Articles

Strategy

Creating an ethical workplace isn't just about punishment when things go wrong – it's essential to foster an ethical outlook within the organisation. Stephanie Casey explains how to give employees the tools to deal with ethical dilemmas. When corporate scandals arise, the senior leader is often reprimanded, but the issue of ethical misconduct cannot simply be solved by firing the manager. Award-winning research from Amanda Shantz and Catherine Baily indicates that while managers are key to cultivating an ethically strong environment, organisations must invest in ‘distributed’ ethical leadership in order to ensure lasting change. In other words, they must hire and cultivate leaders at all levels who promote ethical behaviour. According to the study: “an ethically strong situation is one in which people understand events in the same way, where there is clear information about the consequences of behaving (un)ethically, and where employees have the skills and motivation to do the right thing.” By contrast: “an ethically weak situation is one in which employees respond idiosyncratically, where the appropriate ethical response is unclear, and where there are few incentives to behave ethically.” Fostering ethics So, how do managers foster ethically strong situations? Shantz and Bailey sought to address this question by conducting in-depth case studies of five organisations, as well as surveying a representative sample of over 1,300 workers, across the UK. Their research reveals some important recommendations for managers. Acknowledge ethical ambiguity Many organisations fail to discuss ethical challenges their employees may face. This drives individuals to internalise their decision-making processes with potentially negative consequences.  Instead, managers should encourage open discussion on ethical issues and possible solutions. This gives employees a clear understanding of the organisation’s ethical values and the confidence to seek support from their managers without fear of judgement. Clarify ethical trade-offs In 1950, Johnson and Johnson founder, Robert Wood Johnson, identified four stakeholder groups that he saw as vital to the success of any corporate endeavour: employees, customers, the community and shareholders. He maintained that if a company looked after the first three groups, then the shareholders would be the beneficiaries. Although the needs of all stakeholders can sometimes be met, trade-offs are usually necessary. When employees are unsure of how to manage this tension, unethical approaches can develop. In these scenarios, managers should establish a consistent ethical framework with guidelines for balancing stakeholder interests to help employees weigh up competing concerns and make appropriate decisions. Ensure role-modelling from the top down Employees pay more attention to how leaders behave than what they say about ethics. The key is for leaders to not only be ethical but to also be seen as ethical by championing ethics and values at every opportunity. It’s clear that no organisation is immune to ethical breaches, but by equipping employees to deal with daily ethical dilemmas and enabling them to raise any concerns they may have in the knowledge that they will be protected from any form of penalisation or retaliation, the next corporate scandal could be prevented. Stephanie Casey is the Programme Manager of Integrity at Work at Transparency International Ireland. Amanda Shantz will address the Integrity at Work Conference at the Radisson Blu Royal Hotel, Dublin on 20 November 2019.

Nov 10, 2019
Management

Chartered Accountants Ireland through its network of members nationally and internationally, has undertaken a significant investment throughout the year to strengthen its long established and well regarded mentor programme.  The range of sectors and the variety and background of those who volunteer as mentors has significantly broadened and a particular focus has been to develop a strong mentor base outside of Leinster and well as Internationally.  The number of members now involved is almost 140 with members being added by the day and a positive feature has been the increased mentorship by female members with membership tipping the 33% mark. Having a mentor at any stage of a career has proven to add significant support and value to members as they navigate the complexities of career development and paths.  Since its establishment in X the consistent feedback from the hundreds of Chartered Accountants who have been both mentor and mentee has been their positive experience as they value the humility and professionalism of those that have been involved in the programme. We welcome approaches from members who see the value that mentoring has to offer them to keep a finger on the pulse of new industries, environments and sectors as well as members who would appreciate a listening ear to guide them on their career journey.  This is a confidential service offered by the Career Development & Recruitment Service as part of your annual membership fee and we look forward to hearing from members in the years ahead.   For all questions on this programme please contact in confidence Ciara Tallon on 01-6377 322 or by mail at Ciara.tallon@charteredaccountants.ie

Nov 07, 2019
Spotlight

There is an infinite amount of things a board could and should focus on, but here are five trends boards should consider to help their organisations thrive into the future. By Kieran Moynihan As we count down to 2020 and a new decade, it is very timely to reflect on the significant changes that have happened in the last decade in the areas of boards, directors and corporate governance – and importantly, the major trends that are happening right now that will shape boards across Ireland over the next decade. This time 10 years ago, many company boards were in a firestorm in the middle of the financial crisis. Despite the significant strengthening of corporate governance codes between 2000 and 2010, a significant number of companies and boards, from large Plcs to SMEs ultimately failed to protect the interests of their shareholders, employees and broader stakeholders. This pattern was common across the world and resulted in the major strengthening of corporate governance codes and national company laws, with the result that now – both in Ireland and across the world – there has never been stronger corporate governance codes, company law and regulation in place to ensure that boards and their directors discharge their stewardship duties to secure a sustainable long-term future for their organisation, shareholders and stakeholders. As we stand now, there has never been greater scrutiny placed on boards and directors – not only in large companies listed on the stock market, but across the full range of companies, charities, non-profits and state boards. All shareholders, employees, stakeholders and the public at large have a strong understanding that the behaviours, culture, effectiveness, performance and decision-making of the board of directors have a fundamental impact on the organisation. Despite the strengthening of our corporate governance and company law framework, we continue to see serious issues with boards. Unfortunately, this will continue to be a pattern. The collapse of Carillion in the UK with the catastrophic loss of jobs and significant impact on many state projects in the UK and Ireland sent shockwaves through the UK and Irish business world. When serious problems arise in Plcs and large charity, non-profit and public sector boards, there is significant media attention with in-depth analysis forensically examining how experienced boards made up of executives and non-executives with decades of experience could preside over significant destruction of shareholder value and very poor levels of stewardship that severely impacts on employees, broader stakeholders and – in some cases – the very future of the organisation. In reality, while the scale of the organisation might differ and the board directors may have a lot more experience on high-profile boards, the complexity of the “people equation of the board” means that any board in the large private company, SME, charity, non-profit and public sectors can struggle to deliver on the leadership, performance and responsibilities that their shareholders and stakeholders have entrusted to them. Boards are, by their very nature, complex and while all strengthened corporate governance and company law are very important, the reality is that the behaviours of the individual board members and the board team collectively will ultimately impact on whether the board can genuinely excel as a high-performing board team, demonstrating the highest standards of ethics and ensuring a long-term sustainable future for all their shareholders, employees and stakeholders. It is also important to highlight that in our work week-to-week supporting board teams across Ireland, the UK and internationally across all sectors, we see truly outstanding and committed board teams and directors who are excelling for their shareholders and stakeholders with a genuine commitment to “always do the right thing” and continually improve their board effectiveness and performance. We will now look at the key themes that are impacting boards, both in Ireland and internationally, as we approach 2020. While many of these themes are particularly relevant to Plcs on the stock market, these themes are already finding their way into private companies and charity, non-profit or public sector boards. Progressive board teams, irrespective of scale, are also embracing these trends as key components of the board’s leadership and drive for genuine, long-term sustainable success. 1. Focus on environmental social governance (ESG) One of the most dramatic changes in company boards around the world throughout 2019 was the significant shift away from “shareholder primacy” to a much broader focus on both shareholders and all stakeholders including employees, customers, suppliers, partners, environment, state and the public at large. This is quite a radical shift in thinking for boards and companies. The business and broader community across the world was quite shocked when a highly influential group of 181 CEOs representing many of the largest US and global companies (e.g. Walmart, UPS, Amazon, Johnson & Johnson) issued a radical statement on 19 August which outlined: “While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to: Delivering value to our customers. Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect. Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions. Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses. Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.” This represents a truly seismic shift in how the boards of companies look at their role. While delivering and maintaining shareholders’ best interests will always be a fundamental responsibility of a board of directors, it will now need to be shared with a broader set of responsibilities to operate and behave in a way that takes into account the needs and concerns of all its stakeholders. The emergence of a “multi-stakeholder model of corporate governance” in companies has been coming for some time as globally, there is a very high level of soul-searching going on in terms of “the role of business in society” and the business sector’s responsibility in supporting increasingly challenging social and environmental issues. While this is currently playing out in publicly listed companies, this change is starting to trickle down to large private companies and SMEs will also be affected in time. A key catalyst for this will be that investment, asset management and pension funds globally are now placing a key emphasis on ESG and this in turn is resulting in all types of investment and financial firms – from venture and private equity investors to debt providers, sovereign wealth funds, banks and private investors – now asking a lot more of companies and their boards in the area of ESG and stakeholder engagement in return for their financial investment and support. What does this mean for companies? We are already seeing large companies listed on both the Dublin and London stock exchanges place a very significant emphasis on ESG and broader stakeholder engagement. The boards of progressive large private companies take their lead from their Plc counterparts and over the coming years, a lot more will be expected of the boards of companies and organisations to demonstrate that their actions are not solely driven by profit and financial performance but by a balanced, sustainable commitment to all shareholders and stakeholders for a sustainable future. There is also a strong school of thought globally that this more long-term approach to business and profit will help reduce the enormous impact on jobs and communities caused by excessive corporate pursuit of profits and risk-taking. 2. Engagement between the board and employees  One of the areas that has come into focus as part of this shift to a multi-stakeholder model is the relationship between the board and employees. The vast majority of employees in companies and organisations, large and small, would legitimately ask “what relationship?” Since the first boards of directors formed in the early 1600s (the Dutch East India company is considered by many to be the first company board of directors), the absolute focus of the board and company on financial performance made it very difficult for the board to genuinely partner with employees and incorporate their perspectives and concerns into the board’s thinking and the company’s decision-making. We recently completed an external board evaluation for a FTSE-listed company in the UK. As part of the external evaluation and alignment with the UK Corporate Governance Code (2018), one of the newer areas in the 2018 UK Code we closely evaluated was the engagement model between the board and employees, and how the board and senior management team enabled the “voice of the employees” to be heard and taken into account in the boardroom. In this case, the board and executive team had an outstanding approach to employee engagement and this was reflected in an extremely talented, loyal workforce and an excellent reputation in the market for quality and customer-centricity. The UK’s Financial Reporting Council (FRC), as part of its guidance on board effectiveness, has issued some new far-reaching guidelines as follows: “With the aim of strengthening the ‘employee voice’ in the boardroom, the Code asks boards to establish a method for gathering the views of the workforce and suggests three ways this might be achieved, consisting of: A director appointed from the workforce; A formal workforce advisory panel; and A designated non-executive director.” The FRC also suggested that employee engagement with the board could be further strengthened through: Hosting talent breakfast/lunches, town halls and open-door days; Listening groups for frontline workers and supervisors; Focus or consultative groups; Meeting groups of elected workforce representatives; Meeting future leaders without senior management present; Social media updates; Visiting regional and overseas sites; Inviting colleagues from different business functions to board meetings; Employee AGMs; Involvement in training and development activities; Surveys; Digital sharing platforms; and Establishing mentoring between non-executive directors and middle managers. The vast majority of Plcs in the UK and, by extension, Irish Plcs are finding this a very radical change. In nearly all cases I have seen, Plcs in the UK and Ireland are opting for a designated non-executive director to represent the employee voice and interest in the boardroom. Outside of some European countries like Germany, where employee representation at the board is mandatory for larger companies, Ireland and the UK do not have a history of employee directors at the board. In a survey in October 2018 by the ICSA Governance Institute in the UK, 91% of companies surveyed indicated that they are not considering adding employees to their board, despite the strong encouragement and guidance in the UK Corporate Governance Code and FRC guide on board effectiveness. In my discussions with a number of Plc board chairs, they indicated that their biggest concern was that an employee could lack the overall breadth of experience and judgement to not only contribute effectively at board level and take the overall shareholder and stakeholder perspectives into account, but to handle very difficult issues involving – for example – potential employee layoffs, change of work conditions, etc. This is a very complex area, with sensible arguments on both sides of the debate. In terms of company and organisation boards in Ireland, I believe progressive boards will assess what is happening in this area globally and find ways to increasingly engage employees and to ensure that their perspectives and concerns are genuinely integrated into the board’s decision-making process. In his wonderful new book, Future Proof Your Career, John Fitzgerald provides far-reaching insights into how the workplace has changed fundamentally and that employees today, particularly younger employees, are re-assessing their overall approach to work and their employers. The era of “a job-for-life and unstinting loyalty to an employer who does not genuinely value you” is over and boards are increasingly nervous of the difficulty in attracting and retaining high-calibre employees. When I see a very high-quality board, whether it’s in an SME, Plc or non-profit, charity or public sector board, they have an emphasis on building a genuine relationship with their employees, on nurturing the talent in their organisation, on inspiring their employees to go the extra mile for their clients and colleagues, on treating and supporting their employees with the utmost respect and dignity. Progressive boards also see the very strong link between customer satisfaction and the attitude and performance of employees engaging with customers. We have all seen over the course of our lives the difference it makes, whether as a consumer or a business, when you have employees of a company or organisation who are genuinely customer-centric, who take great pride in delivering for their team and company. 3. A step-change in the value being added by the board As we go into 2020, the boards of companies and organisations have never been under such pressure to demonstrate the genuine value they add to the executive team and the company/organisation. A very wise board chair once said to me that if all the board is doing is merely oversight, and does not add any genuine value in terms of strategic “move-the-needle” thinking, helping the executive team optimise their decision-making and supporting the executive team in times of crisis, the board is ultimately doing a disservice to the shareholders and needs to be refreshed and strengthened to enable the board to add serious value. Every company, no matter how big or small, faces a very challenging set of headwinds, ranging from major business model and technology disruption in their market segment, significantly reduced barriers for new market entrants, unprecedented levels of competition, Brexit, volatile trading and geopolitical considerations as well as attracting and retaining outstanding employees. Clearly, oversight and the board acting as a key line of defence in safeguarding the financial, legal and operational health of an organisation will always be a critical responsibility for a board – but this in itself is not enough to deal with all the headwinds and chart a course of long-term sustainable success for the organisation. A high-performing board team that excels for its shareholders and stakeholders has a great mix of executive and non-executive directors (NED). Successful NEDs bring serious strategic firepower to the board team that both compliments the CEO and executive team, but also brings different thinking. They stretch the strategic envelope of the CEO and executive team in terms of disruptive fresh thinking around new business models, innovation areas, mergers and acquisitions, and new product/service/geographic market areas while helping the CEO and executive team face up to the brutal reality that it’s time to walk away from a once highly successful product or market area. In working with boards, I often highlight the role of the board and NEDs as a lighthouse that shines a light in front of the executive team and, in many cases, illuminates dangerous rocks that could threaten the organisation. As a former CEO and in working with so many CEOs and board teams, I can testify first-hand that many CEOs and executive teams are working so hard and are so close to the day-to-day cut and thrust of the organisation that they can find it very difficult to step back, take a very objective look at their competitors, where customers are at, disruptive trends and the many significant threats and opportunities that are appearing in today’s marketplace. An outstanding NED has a great work ethic, curiosity and interest in the organisation to go the extra mile to not only engage in high-quality challenge and debate with the CEO and executive team, but to roll up the sleeves, add serious value in the strategy area and ultimately increase the quality of executive and board decision-making. 4. Diversity and independence of mind One of the challenges every board faces is group-think, where “a psychological phenomenon in which the over-riding desire for harmony or conformity in the group results in an irrational or dysfunctional decision-making outcome”. While this is a well-documented problem that had a serious role to play in company boards in the financial crisis, it is a problem that can affect any board in any sector, sometimes with quite serious consequences. It is human nature; we can all be uncomfortable with having a contrary viewpoint and being an outlier in a group that manifests itself in a board team. Boards can therefore attempt to minimise conflict and reach a consensus decision without critical evaluation of alternative viewpoints by actively suppressing dissenters and isolating themselves from outside influences. The two proven antidotes to group-think are genuine diversity in the board team and an outstanding board chair who nurtures and encourages high-quality challenge, debate and who legitimises either a single or small sub-set of board members who have a significantly different viewpoint to the majority of the board or major concerns with a key proposed strategy or decision. The critical area of “independence of mind” is very topical in the financial services sector, as regulators focus on ensuring that the non-executive directors are genuinely independent and putting this independence into action in the board team. Alfred P. Sloan ran General Motors from 1923 to 1956 and exemplified this quality of board chair leadership before one of his top committees, saying: “Gentlemen, I take it we are all in complete agreement on the decision here?” Everyone around the table nodded in assent. “Then,” continued Mr Sloan, “I propose we postpone further discussion of this matter until our next meeting, to give ourselves time to develop disagreement and perhaps gain understanding of what the decision is all about.” In recent years, I have watched on in amazement at the debate around female representation on boards in Ireland and why there is still a strong need to impose gender quotas and so on, as there is still a portion of legacy-oriented boards resistant to adding female board members. Anyone who still feels, as we get ready to enter a new decade, that the addition of female directors, younger directors, directors with deep technology expertise and directors with diverse professional and industry backgrounds does not improve a board’s effectiveness, performance and decision-making hasn’t seen a genuine high-quality board in action. The critical objective of diversity on a board is diversity of thinking styles. The highest-performing board teams see diversity as the foundation of their board team’s ability to not only drive optimal decision-making, but also avoid serious group-think problems. As we enter 2020, we are finally starting to get to an era where it will be commonplace to have a wide mix of gender, age, professional, ethnic and industry sector backgrounds where the sole criteria is to have the best mix of the best people who excel as an outstanding, diverse board team on behalf of shareholders and stakeholders. 5. Culture, ethics, behaviours and values Throughout 2019, we have witnessed a series of scandals and serious crises involving the boards of a wide range of organisations throughout Ireland. We are not alone in experiencing this, as board scandals and crises are commonplace in most countries throughout the world. In many cases, there are common denominators such as an overly dominant CEO who rides roughshod over the board; or a CEO and board chair who are too close and, thereby, serious robust challenge and debate are suppressed. In the House of Commons Special Committee report on the collapse of Carillion, the following two conclusions are a frightening insight into how a board can lose its way so badly and drag everybody over the cliff-edge, resulting in tens of thousands of job losses: “Corporate culture does not emerge overnight. The chronic lack of accountability and professionalism now evident in Carillion’s governance were failures years in the making. The board was either negligently ignorant of the rotten culture at Carillion or complicit in it.” And: “Carillion’s directors, both executive and non-executive, were optimistic until the very end of the company. They had built a culture of ever-growing reward behind the façade of an ever-growing company, focused on their personal profit and success. Even after the company became insolvent, directors seemed surprised the business had not survived.” In contrast to these findings is the following recommendation in the Carillion report, which highlights the importance of courage and “conviction to do the right thing” in a board team: “Emma Mercer is the only Carillion director to emerge from the collapse with any credit. She demonstrated a willingness to speak the truth and challenge the status quo, fundamental qualities in a director that were not evident in any of her colleagues. Her individual actions should be taken into account by official investigations of the collapse of the company. We hope that her association with Carillion does not unfairly colour her future career.” Early in my own career, I often wondered about the famous phrase from Peter Drucker that “culture eats strategy for breakfast”. For board teams facing into a new decade, it has never been more critical to focus on culture and the board’s key role in working with the CEO and executive team to define and embody the culture, behaviours and values of an organisation. I sometimes hear board members from companies and organisations say that “culture is only for multinationals with tens of thousands of employees – we don’t have time to worry about things like that, we have a business to run”. Yet around the world, organisations and their boards are significantly increasing their focus on culture, ethics, behaviours and values as they recognise that a strong, healthy and vibrant culture in an organisation is a fundamental enabler of long-term sustainable success. Where an organisation has a healthy, vibrant and respectful culture that is embraced and put into practice day-to-day from the board chair and individual board directors right down to the most junior employee, you have the foundation for a sustainable organisation that is genuinely customer-centric. In this scenario, everyone’s default approach in the organisation is to do the right thing, inappropriate behaviours – irrespective of the seniority of the individuals involved – are not tolerated, and all employees, stakeholders and shareholders are genuinely proud to be a part of the organisation. In hyper-competitive and challenging markets, the stewardship and leadership of the board and executive team will influence an organisation’s employees, culture and customer-centricity. This will, in many cases, make the fundamental difference in terms of which companies and organisations will be still standing in 2030. Kieran Moynihan is the managing partner of Board Excellence, a specialist board practice that helps boards and individual directors excel in the areas of effectiveness and performance. Kieran has over 20 years’ experience serving on boards as a CEO and executive director, non-executive director and board chair.

Oct 01, 2019
Management

A new report proposes measures for the sustainability of owners’ management companies and lays the foundation for a more structured approach to managing apartment complexes or managed estates. By David Rouse In a professional audit or reporting capacity, Chartered Accountants may encounter owners’ management companies (OMC). Readers living in an apartment complex or managed estate may even have been asked to serve as an OMC director. OMCs, while in form incorporated typically as companies limited by guarantee (CLG), are in substance hybrid entities. They sit at a corporate crossroads between not-for-profit companies, property management businesses and residents’ associations (see Figure 1). Many readers will be familiar with the legacy construction and financial issues facing these companies. High-profile cases such as Priory Hall and Longboat Quay, as well as other less prominent estates, have featured in the press in recent years while corporate governance failings in OMCs receive periodic attention in court reporting. The country’s largest OMCs have multi-million euro annual service charge budgets. And yet, the stewardship of these companies is entrusted to unpaid, untrained directors (the term “volunteer director” is deliberately avoided, as in law, there is no such thing – a director is a director). There is as yet no firm handle on the number of OMCs in the country. However, it is estimated that the upper limit is likely to be about 8,000 companies. New report A recent independent report titled Owners’ Management Companies – Sustainable Apartment Living for Ireland considers issues that will be familiar to those with even a passing knowledge of managed estates and OMCs. The report was jointly commissioned by the Housing Agency and Clúid Housing. The Housing Agency works with the Department of Housing, Planning and Local Government, local authorities, and approved housing bodies (AHB) in the delivery of housing and housing services. Clúid is the State’s largest AHB, managing  just over 7,000 homes across the country. The inadequacy of annual service charges, failure to provide for building maintenance (sinking) funds, and the persistent problem of mounting debtors are just some of the topics assessed. International best practice is examined, and Ontario and New South Wales are among the comparator jurisdictions featured. The future demand for high-density housing is signalled in the context of new Government policy, such as the National Planning Framework and the Climate Action Plan. To audit or not to audit? Recommendations for reform across a range of relevant regulatory systems are proposed. Of interest to the accountancy profession will be the recommendation for the removal of the audit exemption currently available to OMCs, most of which, as noted earlier, are incorporated as CLGs. Companies Act 2014 provides the audit exemption for CLGs. In this way, small not-for-profit companies without shareholders may benefit from a reduced financial and administrative burden. (It should be noted that under sections 334 and 1218 of the Companies Act, any one member of the CLG may in effect demand an audit.) However, while OMCs are not-for-profit, they are responsible for multi-million euro property assets in the form of estate common areas. Considering the centrality of OMCs to property values, good title, and quality of living spaces, the value of an audit to members in terms of assurance, transparency, and governance cannot be overstated. Finance and governance The creditworthiness of OMCs in the context of current under-funding is also considered. Regulation over and above corporate compliance enforced by the ODCE is recommended. Dispute resolution outside of the courts is advocated, as are more cost-effective avenues for service charge debt recovery. Personal insolvency practitioners will be aware that OMC service charge debt is an “excludable debt” under the Personal Insolvency Act 2012. Only with the consent of the creditor (i.e. the OMC) may management fee balances be reduced or written off in a Personal Insolvency Arrangement. The report’s other recommendations include mandatory training for OMC directors, the standardisation of accounts to a format prescribed for OMCs, and enhanced insurance obligations. Reform may be some way off. In the meantime, practitioners should be aware that the Institute’s practice toolkit, Owners’ Management Company PQAs, was updated in 2018. This replaces the 2011 version. As the Institute’s product catalogue notes, and as may be recognised from sectoral weaknesses highlighted in this commentary, although OMCs can be small in size, they may be higher-risk clients. Future regulation of the sector could mitigate a number of the risks identified.   David Rouse FCA is an advisor with the Housing Agency, a director of the Apartment Owners’ Network CLG, and a director of one of the country’s largest OMCs.

Oct 01, 2019
Management

Three years after its commencement, Construction Contracts Act, 2013 continues to provide a pathway to cash flow in the construction sector. By Pat Breen TD This innovative and important legislation for the construction sector, which was commenced in 2016, regulates payments and particularly the timing of payments under construction contracts. While many businesses in the construction sector are aware of this legislation, some businesses may not be fully aware of the detailed statutory protections and obligations set out in the Construction Contracts Act, 2013. One of the key objectives of the legislation is to provide payment certainty for subcontractors, who were considered vulnerable in the payment cycle in the construction sector. As the construction sector continues to expand, cash flow is critical and it is cash flow that is at the core of the Construction Contracts Act, 2013. Therefore, construction businesses should ensure that their payment practices comply with the terms of this legislation. I consider that members of the accountancy profession are uniquely placed to encourage construction businesses across the country to review their payment practices to ensure that they comply with this legislation. I welcome the opportunity provided by Accountancy Ireland to highlight this legislation, and a brief summary of the main provisions of the Act is set out below. Further information on the Act is available on the website of my Department at www.dbei.gov.ie. Applicability of the Construction Contracts Act, 2013 to construction contracts The Construction Contracts Act, 2013 applies to certain construction contracts entered into after 25 July 2016, but not to all such contracts. For example, it excludes: Contracts of a value of not more than €10,000; or Contracts that relate only to a dwelling of not greater than 200 square metres where a party to such a contract occupies, or intends to occupy, the dwelling as his/her residence; or Contracts between a State authority and its partner in a public private partnership arrangement. All other construction contracts must comply with the provisions of the Act and the parties may not seek to exclude a contract from the legislation under any circumstances, whether the contract is an oral contract or a written contract. Construction contracts to which the Act applies must provide for the following contractual terms: The amount of each interim and final payment, or an adequate mechanism for determining those amounts; The payment claim date for each amount due, or an adequate mechanism for determining it; and The period between the payment claim date and the date on which the amount is due. Main contracts and subcontracts Main contractors are at liberty to agree their contractual terms with their clients, subject to adhering to the mandatory provisions required by the Act as outlined above. However, if a main contract fails to fully incorporate the mandatory provisions, then the Act imposes the applicable contractual term or terms set out in the Schedule to the Act, terms which are also applicable to subcontracts. The Act stipulates that all subcontracts must at least provide the following payment claim dates: 30 days after the commencement date of the construction contract; 30 days after the payment claim date referred to above and every 30 days thereafter up to the date of substantial completion; and 30 days after the date of final completion. The date on which payment is due in relation to an amount claimed under a subcontract shall be no later than 30 days after the payment claim date. The Act permits the parties to a subcontract to make more favourable provision for a subcontractor than the above contractual terms. Payment claims An executing party – the party which carries out the work under a construction contract – is required to submit a payment claim notice to the other party no later than five days after the relevant payment claim date. If the other party disputes the amount claimed by the executing party, that party is required to respond to the executing party in writing no later than 21 days after the payment claim date setting out the reason(s) why the amount claimed is disputed and the amount, if any, that it proposes to pay to the executing party. It may be possible for the parties to reach an agreement on the amount to be paid to the executing party. However, if no such agreement is reached by the payment due date, the other party is legally required to pay the executing party the amount, if any, which the other party proposed to pay in its response to the contested payment claim notice from the executing party. This payment shall be made no later than the payment due date in accordance with Section 4(3)(b) of the Construction Contracts Act, 2013. Statutory adjudication of payment disputes The Construction Contracts Act, 2013 also introduced, for the first time in Ireland, a statutory right to refer a payment dispute for adjudication. A ‘notice of intention’ to refer a payment dispute for adjudication must be served by one of the parties to the payment dispute. The parties may then jointly agree to appoint an adjudicator of their own choice, within a five-day period. However, if the parties cannot reach agreement on who to appoint, an application may be made after the five-day period to the Chair of the Construction Contracts Adjudication Panel, Dr Nael Bunni, to request the appointment of an adjudicator to the dispute. The appointed adjudicator, whether appointed by agreement of the parties or by the Chair, is required to reach a decision on the dispute within 28 days. This period may be extended in certain circumstances.   Pat Breen TD is Minister of State at the Department of Business, Enterprise and Innovation.

Oct 01, 2019
Ethics

C-suite executives deploying 4IR technologies have a tough ethical terrain to navigate. Putting in place a policy for ethical usage of technology could benefit their businesses – and society. By Timothy Murphy, Swati Garg, Brenna Sniderman and Natasha Buckley Leaders are increasingly demonstrating that they want their organisations to do well by doing good, and with reason. Doing good can be good for business, especially in an intensifying economic, social, and political milieu that is challenging organisations to reinvent themselves as social enterprises. Deloitte Global CEO Punit Renjen’s Success Personified in the Fourth Industrial Revolution report, released at the World Economic Forum conference in Davos, Switzerland, earlier this year highlights that leaders are putting a greater focus than ever on advancing society through their technology efforts. In fact, leaders rated “societal impact” (including income inequality, diversity, and the environment) as the number one factor in assessing their organisation’s annual performance, ahead of financial performance, customer experience, and employee satisfaction. This view manifests in their actions as well – more than 73% of the surveyed organisations have developed or changed a product in the past year to generate positive societal impact through Fourth Industrial Revolution (4IR) technologies. But as organisations strive to take society forward with 4IR solutions, they are often confronted with a host of ethical issues, which can have societal as well as business ramifications. Examples of ethical “missteps” by companies abound in the media these days. One issue highlighted in the news regularly is that of data privacy, and it has left consumers understandably worried about how their data is captured, saved, and used. Another emerging threat is algorithmic bias, where biased data manifests itself in biased recommendations, but we’re yet to fully understand the ramifications of algorithmic bias. Even lack of inclusivity in technology design can negatively impact consumers, as seen in some smart city designs where people in wheelchairs are unable to access eye-level retina scanners as they require the person to be standing. These ethical issues, and others, have led to product recalls, public backlash and/or lost revenue for companies. In this technologically and ethically complex environment, organisational values matter more than ever. If leaders don’t formulate and implement policies on the ethical usage of technology, it will likely become difficult for them to navigate the Fourth Industrial Revolution. More importantly, it could inhibit innovation and financial growth at their companies. Our survey data from this year’s study reinforces the link between ethics and organisational growth (see the sidebar, “Methodology”), providing further rationale for why companies should care about ethically using 4IR technologies. The study found a positive correlation between organisations that strongly consider the ethics of 4IR technologies and company growth rates (Figure 1). For instance, in organisations that are witnessing low growth (up to 5% growth), just 27% of the respondents indicated that they are strongly considering the ethical ramifications of these technologies. By contrast, more than half (55%) of the respondents from companies growing at a rate of 10% or more are highly concerned about ethical considerations. Ethical concerns don’t always translate into action Most executives responding to our survey were concerned about ethical usage of 4IR technologies. More than 30% of the respondents strongly agreed that their organisations are highly concerned about ethical technology usage and another 50% indicated a moderate concern. Yet when it comes to action, this number dropped significantly – just 12% of the respondents strongly agreed that their companies are actively exploring related policies or already have them in place. So, what’s preventing leaders’ ethical concerns from being translated into ethically driven actions? The answer may lie in the dynamics of the C-suite. Our survey found that concern over ethically using 4IR technologies is not consistent across the organisation (Figure 2). Starting at the top of the C-suite, only 15% of CEOs and presidents expressed strong concern about ethical technology usage (considerably less than the 30% average across the C-suite). The chief information officer (CIO), a role often charged with managing these technologies, averaged only 16%. Contrast this with roles like the chief sustainability officer (CSO) and the chief operating officer (COO) who indicated strong ethical concerns at 50% and 41% respectively, and a clear disconnect emerges between the CEO/CIO’s line of thought and that of the CSO/COO. Given that reputation and social impact are critical aspects of the CSO’s role, executives in this role are more likely to care about ethics. The COO, who oversees enterprise-wide operations, is likely to be more aware of how work is executed and, therefore, have greater awareness of potential ethical issues. However, those with more influence on the 4IR strategy – the CEO and, to a lesser degree, the CIO – seem to be disproportionately swaying organisational policy. Only 12% of the organisations whose executives were surveyed have policies in place or are actively exploring the implementation of policies (tracking closer to the level of concern conveyed by the CEO and CIO) on ethical usage of technology. Extending ethical thinking across the organisation While 4IR technologies offer immense opportunities, they also bring many ethical challenges as they’re poised to transform the way we live, work and interact with each other. As a result, leaders at the helm of companies looking to benefit from these technologies need to navigate a complex ethical environment. Organisations could benefit from ensuring that proper policies are in place and are adhered to. The following steps can help leaders move forward in this direction: Set the tone at the top: if the CEO doesn’t consider ethics a priority, it will likely be difficult to get the rest of the organisation to do so. Not only should the CEO emphasise the importance of ethical considerations in the usage of technology, they should also encourage other members of the C-suite to express their concerns. The CSO and COO, by virtue of their roles, have a unique line of sight into the importance of ethics in supporting growth initiatives. This knowledge-sharing between the CSO and COO and the rest of the C-suite can empower executives in the organisation to tailor their solutions with ethics as a top-of-mind design consideration; Cultivate an ethical culture: ethics is not only an issue for C-level executives to consider, but it is also of prime importance to an entire organisation. It starts with clearly messaging ethical policies and guidelines – and leading by example – but it also includes giving your workforce a voice in the discussion. As senior executives work out strategies to integrate these technologies into every facet of the workforce, it’s important that they provide other employees with avenues to express ethical concerns about their usage; and Iterate the policy: 4IR technologies are rapidly changing and accordingly, policy too should change. Just as government regulation is trying to keep pace with autonomous vehicles and smart cities, organisations should establish constant touchpoints to ensure that their ethical policies keep pace with the rapidly changing technology environment. For CEOs and other C-level executives, integrating the ethical considerations of employees across the organisation and other stakeholders into their day-to-day operations also makes good financial sense. The organisations that set the tone at the top are the ones that are likely to be best positioned to help their businesses – and society – flourish. This article was originally published by Deloitte Insights. View the article at www.deloitte.com/insights/industry-4-0-ethics Methodology This research is an extension of the Success Personified in the Fourth Industrial Revolution report, which is based on a survey of 2,042 global executives and public sector leaders conducted by Forbes Insights in June–August 2018. Survey respondents represented 19 countries from the Americas, Asia and Europe, and came from all major industry sectors. All survey respondents were C-level executives and senior public sector leaders including CEOs/presidents, COOs, CFOs, CMOs, CIOs and CTOs. All the executives represented organisations with revenue of US$1 billion or more, with half (50.1%) coming from organisations with more than US$5 billion in revenue. 65% of the public sector leaders represented organisations and agencies with budgets of US$500 million or more.

Oct 01, 2019
Management

The most successful managers and leaders help their teams learn from mistakes in an atmosphere of respect and acceptance. By Annette Clancy Your doctor tells you that you will need to undergo major surgery for a life-threatening condition. Fortunately, you have private health insurance, which will allow you to choose the hospital in which the procedure will take place. There is little difference between the hospitals apart from one issue. Of the three covered by your insurance, Hospital A reported making 100 clinical errors in the past year; Hospital B reported 75 and Hospital C reported just 20. Which hospital would you choose for your surgery? On the face of it, Hospital C seems to be the obvious choice. Fewer errors might suggest that this is a safer place in which to have surgery for a life-threatening condition. Any hospital making five times that number of mistakes must be doing something wrong, surely? Not quite. Amy Edmondson, Professor of Leadership and Management at Harvard University, started out thinking precisely that when, as a graduate student, she undertook research on medical team errors. The data initially didn’t make sense. Why would the best medical teams have the highest rate of reported errors? Edmondson studied the data in more detail to explore exactly how the teams communicated about errors. She discovered that the teams with the highest rate of reported errors were the ones that talked frequently about their mistakes in order to learn from, and reduce them. To do this, they created an atmosphere Edmondson termed “psychological safety”. Anxiety zone vs comfort zone Psychological safety can be defined as “being able to show and employ one’s self without fear of negative consequences of self-image, status or career”. In psychologically safe teams, there is a shared belief that the team is safe for interpersonal risk-taking. As a result, team members can learn from mistakes in an atmosphere of respect and acceptance. In psychologically unsafe teams (or organisations), members are afraid to speak out, particularly to authority figures who may question their credentials or status. Edmondson gives an example of a nurse who suspects that a patient may have been given the wrong dose of medicine but doesn’t call the doctor to check because the last time she did, the doctor questioned her competence.  Psychologically unsafe teams don’t speak up about errors and as a result, mistakes are made – some of which may have enormous repercussions. Edmondson cautions managers and leaders against holding employees accountable for excellence without creating psychological safety, as this creates an unhealthy anxiety zone. The opposite – creating psychological safety without accountability – creates a comfort zone, which is not high-performing. A good balance between the two is what is required, and this can be created through dialogue and discussion. Practical solutions How can team leaders and managers help to create psychological safety? Edmondson has some suggestions. Frame the work as a learning problem rather than an execution problem, thereby highlighting the uncertainty and interdependency required of the team. Frame the project as something that is new¬; as something that has not been undertaken before. No one person can deliver the project, therefore every person’s input is required. Establish that learning is an ongoing and necessary part of the project from beginning to end. Admit your fallibility as the team leader or manager. You cannot anticipate and solve all problems that will arise, and this will create safety for speaking up. The more you admit you don’t know, the more each individual on your team will be encouraged to admit their own fallibility. And finally, model curiosity. If you ask questions, you will create a culture in which others will feel safe enough to do so. Asking questions creates dialogue, and out of dialogue comes learning. Dr Annette Clancy is Assistant Professor at UCD School of Art, History and Cultural Policy. Annette’s research focuses on emotions in organisations.

Oct 01, 2019
Strategy

Large customers are good for business, but can stretch your cash flow.  By Peter Brady Have you recently received a ‘polite letter’ from your US multinational corporation (MNC) customer advising of a stretch in your credit terms from 30 days to 90 plus? Or, indeed, from any of your MNC customers? In recent years, the extension of MNC credit terms has become business as usual across the globe but for SMEs, it is anything but business as usual. Think about it. How would an extension of credit terms impact on your cash flow and projections this year? And what are the implications for your growth strategy in 2020 and beyond? Winning a contract with a large MNC is a measure of success for established SMEs. However, an extension of credit terms can feel like a double-edged sword as it puts excessive strain on cash flow. Why does it matter? A strain on your cash flow can have many implications, all of them negative. The first impact is on your suppliers – they expect payment in 30 days. There is an immediate gap in cash flow and you are unlikely to have sufficient sway with your suppliers to realign. This could mean: You are not in a position to fund the initial costs of fulfilling contracts; Pressure is placed on your existing supplier relationships in the form of increased risk around quality, timely delivery and higher prices; Capacity to deliver on-time to customers is affected; and Ability to grow the business at pace is limited. The lost opportunity  It may seem obvious, but having cash tied up in debtors with long credit terms is a fundamental challenge for most SMEs. If SMEs could access this cash early, it would give a distinct competitive advantage when negotiating terms with key suppliers. Think of what you could do if your invoices were paid on day one, not day 90. First, you could pay your suppliers early, enhance the relationship and ultimately secure better terms. Second, you could deploy funds into driving new customer acquisition and fund new business tenders with the comfort of cash flow certainty. So what do you do? You have two options: 1. You could try to negotiate: know where you stand in your customer’s eyes. Do your products or services play an important role in their success? Is your product or service critical to their delivery? Even so, unless you are the sole producer of a key strategic element, there’s another company out there to potentially replace you. Alternatively, your customer might offer softer credit terms in exchange for a pricing discount – but cutting margins is an extremely expensive source of finance and unlikely to be recovered. This course of action doesn’t make good business sense, as it is a race to the bottom. 2. Look at funding options to bridge the gap: the financial market is developing all the time to reflect the needs of business. For decades, when Ireland’s SMEs needed to fill the cash flow gap left by extended credit terms, they had limited choices – commercial overdrafts, short-term lending or an invoice discounting facility. That may have been adequate in the past but such is the success, ambition and global reach of Irish SMEs across all sectors today, this range of funding options falls short of their requirements. Commercial overdrafts are harder to secure and are generally seen as an unreliable method of funding, not directly aligned to the changing requirements of a business. Similarly, short-term lending is onerous to put in place and comes with significant levels of conditionality. An invoice discounting facility continues to plug the cash flow gap for many SMEs in Ireland. However, invoice discounting facilities are operationally clunky and carry significant fixed and hidden costs and limitations. They are therefore not really fit for purpose for today’s SMEs. Many SMEs often have a small number of key strategic customers in their sales mix. Supported by government bodies such as Enterprise Ireland, Ireland’s SMEs have a global footprint. Exporting is crucial to scalable business success, and not just to Western Europe. SMEs are securing contracts across the globe – US, Canada, EMEA and Asia. Invoice discounting facility For years, the invoice discounting facility has serviced working capital funding requirements. However, the facility comes with three major limitations: The facility limit; Geographical restrictions; and Debtor concentration risk limits. The facility limit At the outset, SMEs are subjected to a long and onerous process to get approval for the invoice discounting facility. Fair enough, you may say, as this is effectively a loan and it follows that the bank providing it decides how much the facility is for. SMEs must enter into a long-term commitment, often saddled with non-usage charges or exit fees. SMEs must also pay credit insurance and sign a personal guarantee – something entrepreneurs have grown to fear. Geographical restrictions Exporting to the UK? Great. Exporting to United States (US)? Not so great. Country risk and the law of the land plays a major role in how traditional lenders assess the risk and granting of facility limits. If the country in which your customer is located is outside of what is considered in banking terms to be palatable, funding limits and exclusions will apply. Debtor concentration risk limits The most common reason for restricting funding under an invoice discounting facility remains customer or debtor concentration. It applies when an SME becomes over-exposed to a single debtor. The debtor could be a large household brand name, but traditional lenders must impose facility limit restrictions. For SMEs, it is somewhat ironic that the more business you do with a key customer, the more your funding is limited. So, back to your US multinational extending its credit terms. You’ve worked tirelessly to win this business, but you can’t sustain 90 days’ credit and this customer accounts for over 60% of your debtor book. Your business needs: Consistent certainty of funding, without any limit relating to geography or debtors; Funders who recognise the strength of your business model and the substance of the underlying transactions; and Access to working capital to scale your business globally. Market and product innovation Invoice, purchase order and recurring revenue trading are collectively known as “receivables trading”. Receivables trading ticks all the boxes. It enables SMEs to leverage their customer relationships. By selling invoices and future invoices (purchase orders) to a pool of capital market funders, SMEs can access finance when they need it. What difference do capital market funders make? The funders are capital market institutional funders, pension funds, corporates and sophisticated investors – and there is a large pool of these funders. The fact that there is not just one entity, but a pool of funders purchasing the receivables (invoices or purchase orders) eliminates the requirement for imposing concentration or geographic limits on the SME. It extinguishes the need for any commitment, lock-ins or fixed costs. At no stage is there an ask for a personal guarantee. This funding solution puts control back into the hands of SMEs and allows them to decide when they need to access funding on their terms – a liberating benefit. How does it work? Receivables trading is available via an online platform. A pool of institutional funders (the buyers) are members of the platform. SMEs (the seller) uploads their invoice or purchase order and the buyers purchase them. The model is ideally suited to established SMEs with MNC or sovereign debtors. The SME can use the online platform in conjunction with their existing facility by carving out specific debtors from the invoice discounting facility. In conclusion Business is constantly changing and working capital funding has caught up. Alternative funding where sellers and buyers connect directly via an online platform is fast becoming the norm. With this funding solution, SMEs can tender for business of any scale globally – confident that they can fund the upfront costs. It’s a gamechanger for most. According to the Central Bank Survey of SMEs, which was published in January 2019, the top two reasons for credit applications were working capital, and growth and development. ISME’s quarterly business survey reveals that 70% of Ireland’s SMEs still rely solely on traditional bank funding. In Europe, it’s only 30%. Alternative funding is the future of funding. Peter Brady FCA is Co-Founder and CFO at InvoiceFair.

Oct 01, 2019
Ethics

The Institute’s new guide, a five step approach to considering organisational culture,  serves as a useful starting point for a board, or those in executive or senior management positions. By Níall Fitzgerald The Business Roundtable is a group of influential CEOs from America’s leading companies, and it recently renewed its “statement of purpose”. Having spent 22 years following a shareholder-first philosophy, the group has adapted to societal expectations for better business behaviour by expanding its fundamental commitment to deliver value to other stakeholders including customers, employees, suppliers and communities. It is hard to imagine how this commitment will be honoured without changes to organisational culture by the 181 CEOs who pledged to lead their companies for the benefit of all stakeholders. Closer to home, the UK Corporate Governance Code was revised by the Financial Reporting Council (FRC) in 2018. Its original source from 1992, The Financial Aspects of Corporate Governance (otherwise known as The Cadbury Report), outlined the importance of a principled corporate governance code “for the confidence which needs to exist between business and all those who have a stake in its success”. The only stakeholders mentioned in that version, and successive ones, were institutional investors and shareholders. Twenty-six years later, the Code not only refers to “a wide range of stakeholders” but also formalises the board’s role in aligning an organisation’s culture with its purpose (vision), values and strategy (mission). Reflecting this trend, investors and business analysts are ramping up their cultural assessments of organisations. A study conducted in 2015 by global culture organisation, Walking the Talk, with Stamford Associates in the UK, revealed that 94% of investment managers based mainly in the United States (US) and UK include culture as an important consideration in their investment decisions. In January 2019, State Street Capital, one of the world’s largest asset managers, wrote to the chairs of more than 1,100 organisations in the S&P 500, FTSE 350 and similar organisations in France, Germany, Australia and Japan, calling on them to review their culture and explain its alignment with their strategy. Investors are voting with their feet, which was evidenced by the dramatic fall in Barclays’ share price in 2017 following CEO Jes Staley’s attempt to identify an internal confidential whistleblower, which went against the organisation’s espoused values and culture. Institutional investors are also taking a more active role in driving change by making their expectations clear – not just around the rate of returns, but also on the organisational culture they wish to align with. The Japanese Government Pension Investment Fund (GPIF), one of the largest pension funds in the world, implements an environmental, social and governance (ESG) investment decision-making methodology. This methodology considers factors such as the quality of a company’s culture as well as management, risk profile and other characteristics. They are not alone, with many other institutional investors following a similar approach. In producing Chartered Accountants Ireland’s Concise Guide for Directors: A Five-Step Approach to Considering Organisational Culture, we identified a consensus that organisational culture plays an increasingly important role in influencing behaviours in an organisation. Given the importance of organisational culture, several questions were raised during the production process. Four of the most common are outlined below: 1. Who is responsible for organisational culture? The board has overall responsibility for ensuring that an organisation’s vision, mission and values are aligned with the culture of the organisation. In the same way the board is responsible for approving the strategy of the organisation, it is also responsible for agreeing on what the target culture of the organisation (i.e. the culture the organisation should aspire to) should be. Each member of the board, executive or non-executive, has a responsibility to lead by example and promote the target culture; this involves ensuring that adequate time is allowed on the board agenda for discussions on organisational culture. 2. Who influences organisational culture? It depends. This is where the phrases “the tone at the top” and the “echo from the bottom” comes into play. Unlike strategy, culture is an organic and fluid ecosystem, and while a target culture will be agreed by the board, the process of shaping and realising it is gradual. It involves leadership from the top of the organisation (top-down) and engagement from the bottom of the organisation (bottom-up). Who has the greater influence in shaping organisational culture will differ from one organisation to the next. For example, it may be the director(s) in a small owner-managed family business, the CEO in a multinational, the founder in a not-for-profit organisation or the legacy staff in a government department. It isn’t just internal people or politics that influences the target culture. It will be influenced by many other internal and external factors including, but not limited to, regulatory landscape; political environment; social norms; trade union participation; the history of the organisation; leadership capability within the organisation; level of ambition of people to lead change; common values shared across the organisation; and both internal and external drivers of change (e.g. digitalisation). The organisation’s culture ultimately influences and shapes the interactions with all stakeholders. 3. What are the best organisational culture traits to have? There is no one-size-fits-all. What works for one organisation may not work for another in a different stage of development or in a different sector. The objective is to determine common cultural traits that can be embedded across the entire organisation, while recognising and accepting that sub-cultures also exist. For example, larger organisations may have subcultures in different geographies or in various departments or business units. To be effective, cultural traits should be realistic and counterbalanced. Promoting a culture of collaboration and collective responsibility, for example, should be balanced with ensuring that people are individually accountable for their contributions and actions. It is also important to acknowledge that organisational culture is dynamic; it is constantly changing in response to internal and external influences. Culture risks exist, like any other risk, and organisations will need to manage accordingly. Mitigation measures include ongoing communication and reinforcement of the organisation’s core values and behaviours, combined with risk-based culture audits or reviews. Internal controls with early warning systems are useful for alerting management to behavioural changes that can negatively impact culture – for example, where a production line debriefing identifies that downtime is being recovered by taking shortcuts to stay on schedule. 4. Where do I start when considering organisational culture? The five-step approach to considering organisational culture is presented in Figure 1. This approach serves as a useful starting point for a board, or those in executive or senior management positions, to consider organisational culture. It is designed to work in tandem with the vast reservoir of tools and methodologies for assessing, defining and shaping organisational culture. The steps can be summarised as follows: Assess current culture: every journey has a starting point and it is important to understand the current culture of the organisation before agreeing the path forward. Evaluate effectiveness: determine what works well with the current culture, and what doesn’t. Are there opportunities for quick, positive change for better business behaviour? And what will require more effort? Define/refine target culture: what influences the organisation’s target culture? And does it clearly align with the business purpose (vision) and values? Identify gaps: identify, prioritise, risk-rate and cost the gaps between the target culture and the current culture in order to inform the organisation’s cultural change programme; and Close gaps: prepare the change programme to shape the organisation’s culture. Throughout the journey, it is important to communicate the changes, evaluate whether the implemented changes are having the desired effect, and reinforce the reasons for change and how they align with the organisation’s vision, mission and values. Organisations are investing more in getting their culture right. The various roles that Chartered Accountants play within organisations involve a level of influence in assessing, defining and shaping organisational culture. While this influence may not seem obvious at first, it becomes more apparent when you consider that many Chartered Accountants hold positions that provide a strategic, overarching view of what is happening in their business unit or across their organisation. By applying their analytical and reporting skills, Chartered Accountants can use their access to information and insights, as well as their opportunities to observe behaviours across the organisation, to significantly support the development of a healthy culture. Whatever role you play within an organisation, consider how you can positively influence and shape a healthy organisational culture.   The Concise Guide for Directors: A Five-Step Approach to Considering Organisational Culture is available to download from Chartered Accountants Ireland’s Governance Resource Centre. Níall Fitzgerald ACA is Head of Ethics and Governance at Chartered Accountants Ireland.

Oct 01, 2019
Feature Interview

Claire Fitzpatrick FCA looks back on her career, from trainee auditor to the frontier of blockchain technology innovation. What’s wrong with me?” For someone who has enjoyed a varied and successful career in professional services and large corporations, it might come as a surprise to learn that Claire Fitzpatrick asked herself that very question in her 30s as she watched her peers move into senior roles. “You just need to get on the track,” she was told – a less than subtle reference to the perceived linear path to CFO/CEO roles. But as Claire readily admits, this isn’t how she operates. The Dublin native has made serendipitous career moves since leaving PwC in 2000 to work with one of her audit clients, Point Information Systems, but the draw has never been status or salary. Instead, her career has been guided by two things – people and culture. Venturing out While working as a PwC Audit Senior with Point Information Systems, Claire saw the culture she wanted to work in – ambitious, fast-changing and transformative. “I remember coming back after a year and the company had changed completely, whereas some other companies I audited would be the same year-on-year,” she said. “It was evolving at pace and the energy there just stood out for me.” Claire joined the company and her role expanded her knowledge base in a variety of new disciplines from engineering to sales and marketing. This diverse exposure would be of great benefit to her later in her career, not least when she returned from a working holiday with Nestlé in Australia and New Zealand to a role in O2. The company was in expansion mode at the time and Claire managed to experience the full life-cycle from early adoption to the sale of the business, which she was centrally involved in. From there, Claire moved to Wayra, Telefónica’s start-up accelerator, to accelerate digital embryonic businesses. As Claire recalls, it was a move that raised some eyebrows at the time. “A lot of my peers thought it was a step down for me in career terms, but I really wanted to get involved in the innovative digital space,” she said. “It reminded me of the energy and pace I felt in Point Information Systems and I had experience of both start-up and corporate environments, so I was able to bring a lot to the table.” Start-up life In her first three weeks in Wayra, Claire met with hundreds of entrepreneurs and developers across the tech ecosystem and this intensity continued unabated for three years. The hub was a success, investing €6 million in the Irish start-up ecosystem including 33 equity investments while returning the same amount. “For early-stage start-ups, that’s a great return,” she said. However, following the sale of O2 to Three in 2014, Telefónica ultimately closed its Wayra hub in Ireland and Claire decided to take on a new challenge.  The idea of starting her own business had never entered her mind, but the closure of Wayra meant that Claire and her two colleagues faced a fork in the road. “We saw real value in what we were doing at Wayra, and we were good at it,” she said. “So, we decided to set up Red Planet and to flip the accelerator model on its head. We started with the corporate to understand the problem it was trying to solve, and then sourced the best start-up talent to solve that particular problem.” The venture was successful and it achieved what Claire describes as “the holy grail” for start-ups – being sold to a large corporate. Red Planet was acquired by Deloitte in 2017 and Claire continued to work with the firm for 18 months. “Selling our start-up was a tough decision, but the right one. Deloitte was really good at the strategy piece and identifying the challenges facing their clients, while Red Planet was able to find the solutions in the start-up world and develop them to scale. We were very good at curating diamonds in the rough.” Blockchain calling At this stage in her career, Claire faced an inflection point. Not content to simply go with the flow, she began plotting her next move when an opportunity arose to join a new blockchain venture headed by the co-founder of Ethereum, Joseph Lubin. The company was founded in 2014 and was at the forefront of Ethereum blockchain technology innovation. It needed someone to establish its base in Dublin and build its team, and the company ultimately chose Claire as its Director of Strategic Operations. The Dublin hub, which is known as ConsenSys Ireland, is developing the products that will enable society and enterprises to advance to the next level of blockchain adoption. Claire is very excited about the bigger picture. “In the future, you won’t even know you’re interacting with blockchain. It will be just like the Internet where nobody really thinks about or considers the infrastructure or protocols – they just see the applications,” she said. “Blockchain will be as transformational as mobile telecommunications was 25 years ago. We are part of a new industry, a new technology, new products, and a market which we have to create and educate. That’s a big challenge, but a very exciting one.” Leadership style But amid the excitement and potential lies ambiguity, and it takes a certain type of person to thrive in an ambiguous environment according to Claire. “Given the nascent nature of blockchain technology, we’re continually refining our vision and new industries are constantly wanting to explore new directions with the technology. So, although everyone in the company has goals to achieve, some are set in stone and some evolve to meet the needs of our clients,” she said. “That’s no different to a traditional organisation but we do differ in that we could have to tell staff to drop projects and pivot in a new direction at a moment’s notice – and some people find that challenging.” Luckily for Claire, working in a maturing industry adds to the allure of her new role in ConSensys – one she believes will contribute to a decentralised, democratised future for individuals. “It’s a rollercoaster, but with experience and age comes perspective and balance,” she said. “And the most important thing for me, throughout my career, has been the people I work with. My colleagues today are not necessarily wired like me but we work well together in the good times, and the challenging times, to make something great happen. That’s what it’s all about.”   Claire’s advice for Chartered Accountants Chartered Accountants will have a central role in the deployment of blockchain technologies and rather than wait for mass adoption, Claire believes the time to upskill is now. “The conversation around blockchain has moved from proof of concept to pilot schemes so when we’re talking to clients, we’re discussing real systems as opposed to hypothetical ideas,” she said. “So, I wouldn’t recommend waiting to start blockchain projects because we will reach the point of mass proliferation quicker than most people expect.” “The first step for all Chartered Accountants is education. There are free educational resources through ConsenSys Academy and Blockchain Ireland is working to raise awareness of what’s coming down the tracks,” Claire added. “But it’s vital that Chartered Accountants realise that anyone can quickly become a laggard in this dynamic environment.” “Finally, I would stress the point that Chartered Accountants don’t need to worry about losing their heads in the weeds trying to understand the programming and coding side of things,” she said. “They should educate themselves with regard to the characteristics and applications that they can see for blockchain in their business.”

Oct 01, 2019
Ethics

Francis McGeough reports on a study of governance practices in fifty of the largest charities in Ireland which reviewed the information contained in their annual reports.   The importance of good governance in charities was highlighted by shortcomings in two well-known charities last year (Rehab and the Central Remedial Clinic). Bad publicity from these events had a serious impact on the fundraising efforts of all charities with many reporting a substantial drop in donations. Donors to charities need to be assured that their funds are being used appropriately and the requirement for increased accountability highlights the importance of governance practices in charities. Charities must not only apply the highest standards but must also be seen to be behaving appropriately.   A key task of the recently established Charities Regulatory Authority (CRA) is to increase public trust in the charitable sector. The legal framework under the Charities Act 2009 gives the CRA legal tools to do this. However, the essence of good governance lies in the culture of an organisation rather than following the letter of the law.  Governance The word governance originates from the Latin word meaning to steer or to give direction. While, there is no all-embracing definition of governance, there is agreement that governance involves taking responsibility for managing the organisation, balancing the needs of stakeholders, ensuring accountability to stakeholders, and ensuring that the organisation achieves its objectives. Therefore, the Board should have a strategic focus; with a focus on organisational performance, and a clear division of responsibilities between the board and managers.   Charities have a valued status in society due to their good deeds. Consequently, charities are likely to be held to a higher set of standards. Thus, when things go wrong, they are particularly susceptible to public disillusionment. Therefore, charitable organisations must ensure that they maintain their reputation. Good governance practices can help in this process by underpinning public confidence in the charity, and reduce the likelihood of scandal.  Complexity of governance in charities  In publicly quoted companies, the Board represents shareholders and they hold the management to account for their performance (measured by profits and share price). However, for charities, there are a number of complications: Firstly, there may be many stakeholders with conflicting views on how the organisation should be run; secondly, there may be no agreed measure of performance and stakeholders may have different views on what is good performance which increases the difficulty for the board in holding the managers to account; thirdly, many charities rely on the goodwill of their volunteers and managers who may become resentful if their actions are constantly questioned by the Board.    Therefore, charities must find the right balance between trust and control. Too much control can lead to distrust and poor relations with the board. On the other hand, too much trust can lead to complacency and potentially bad behaviour. Survey The annual reports of fifty of the largest charities in Ireland were reviewed to determine the level of disclosure of the key elements of governance. The charities were identified from the Boardmatch Ireland listing of the hundred largest charities in Ireland. The annual reports were downloaded from the charities’ websites in October 2014. Therefore, it would be expected that the latest reports would be for 2013; however, 30% of the charities had annual reports relating to 2012 or earlier (Table 1). While there may have been a delay in uploading the accounts onto the websites, it is surprising -- given the importance of the website as a communications tool -- that the websites did not have the latest annual reports.    In relation to the disclosure of the key elements of governance, Table 2 sets out twelve elements of governance are derived from governance codes such as Boardmatch Ireland and the UK’s Charity Commission’s Statement of Recommended Practice (SORP) and shows the number of organisations which reported each element in its annual report.    Most of organisations examined provided the names of the board members in their annual report (forty three organisations representing 86% of the sample).     In relation to the elements that could be used as proxies to determine the effectiveness of the board, the level of reporting by the organisations examined is mixed (the percentage of organisations disclosing these details is outlined in brackets following the element). Board effectiveness can be measured through the recruitment process for board members (26%) biographical details of the board members (6%); length of time on the board (6%); the existence of induction processes (16%); the number of board meetings (24%); and the existence of sub-committees (52%). Therefore, readers of the annual reports would have difficulty in assessing board effectiveness in managing the organisation.    Notwithstanding the recent controversy about pay levels for managers in some charities, only fourteen organisations (28%) disclose the pay levels for their senior managers.    In relation to resource management, the level of disclosure is again quite low, with 44% of organisations identifying their key risks and outlining how they manage these. In addition, only 20% of the organisations outline what their policy in relation to reserves is.   In relation to the disclosure of non-financial information, a majority (58%) disclose some information. The study does not attempt to evaluate the quantity or quality of the non-financial information disclosed but simply examines the existence of non-financial information.    The final element examined is whether a statement of compliance with a governance code is made. The research finds that just 22% of organisations disclose such a statement. This may be due to the relative newness of a governance code and as such, it is expected that this will improve in the future.   Table 2 shows that only three of the twelve elements are disclosed by more than half the organisations. Overall, this suggests that the level of disclosure is limited and this is further emphasised by Table 3 which outlines the range of elements disclosed by the organisations examined. Table 3 shows that thirty of the organisations (60%) disclosed three or less of the twelve elements. While, only four organisations (8%) disclose ten or more elements. Conclusion The research suggests that there is considerable room for improvement. In relation to the dates of the annual reports, it is a matter of concern that fifteen organisations did not have their latest accounts available on their websites. The research suggests that organisations are publishing a very limited amount of information. Thirty organisations (60%) disclose three elements or less, while four organisations (8%) close nine or more elements. Furthermore, only three elements are disclosed by more than half of the organisations.    In overall terms, it would be difficult for the readers of the annual reports to be able to assess the effectiveness of the board. Furthermore, given the recent controversies about remuneration levels in two Irish charities, it is somewhat surprising to see that only 28% of the organisations surveyed disclosed remuneration details of their senior managers.    The annual report provides a window into what is deemed important by the organisation and is also an opportunity for the organisation to account to its stakeholders for its stewardship. If that is the case, the evidence presented here would suggest that Irish charities place limited emphasis on presenting information on governance and performance. In today’s environment, this is a missed opportunity. However, this does not imply that there is a problem with governance standards in Irish charities but it does suggest that charities must review the information provided because they should not only apply the highest standards but must be seen to do so. In this regards, there is much room for improvement.    Francis McGeough PhD lectures in Accounting and Finance at the Institute of Technology, Blanchardstown. This article is a shortened version of a paper to be presented at the British Accounting and Finance Association annual conference in Manchester in March 2015.  

Sep 13, 2019
Ethics

Justin Moran explains why private sector boards need a sharper focus if they are to perform optimally in the best interest of the company. The benefits of effective governance for private sector companies includes more strategic thinking, improved decision making processes, proactive risk management and, ultimately, leveraging investment and capital at more competitive rates. Yet many private sector companies, which are not subject to regulation, operate outside any mandatory governance codes and are typically reliant upon a smaller governance structure to help direct and control the activities of the company. For small- to medium-sized (SME) and large companies, this places a significant burden on the board of directors. The present business environment also means that the board must: Be more proactive in the establishment and monitoring of strategy, including those objectives which underpin growth; Assess how well the organisation is positioned to attract and retain the skills and resources necessary to deliver the strategy; Remain alert to developments in competition and innovation; Be aware of new and emerging trends in the use of technology and data, digital marketing and social media; and Identify and monitor risks as they develop and emerge, including financial, operational and compliance-based risks. Overall, board effectiveness plays a key role in ensuring that companies are adequately positioned to face these challenges and opportunities. Improving board performance and outcomes To enhance board effectiveness and outcomes, private sector companies should start by considering the following elements of an overall governance framework: Aligning the governance structure with the growth of the company: Identifying where the company is positioned within the corporate life-cycle is key to determining its governance needs. However,it is something that is commonly overlooked. It is imperative that companies strike a balance between what has been effective in achieving their success so far, and what strategies can sustain longer-term success. If the governance approach results in too much bureaucracy, organisations will inadvertently create a potential downside risk. Identifying and promoting the intangible asset of culture: One of the significant challenges facing boards is identifying how to strike the right balance when seeking to understand and develop the intangible asset of culture. It is informed by the levels of support and challenge around a boardroom table. It has also been recognised as serving a key role in determining the effectiveness of the board in leading and directing the business and its ability to achieve its full potential. Boards can start by asking: what are the vision, mission and values of the organisation and how well is this articulated? What behaviours are desired and undesired within the organisation? And how is the ‘tone at the top’ set and is it permeating throughout the organisation? When considering these questions, the board should assess the type of culture that is desired and suited to their implementation of governance measures relative to their position in the corporate life cycle. Board composition and structure It is well recognised that not having the correct people with the necessary skills is a huge impediment to development as a board. While its effect on boardroom behaviour and culture should not be underestimated, any private sector enterprise seeking to grow new markets, build wider networks and harness experience based on a proven track record must carefully evaluate whether the board has the necessary skills in place. To develop and build upon the capabilities of the board, a key step is the decision to invite external directors (non-executive directors) onto the board. A more diverse board composition generates a significant impetus towards better governance and is likely to have a significant impact on the culture of boardroom decision-making. In terms of overall structure, the vital relationships that must function efficiently include the chair and the CEO, and the CFO and the audit committee. The implementation of Companies Act 2014, including the requirement for directors of all large companies to establish an audit committee (or disclose otherwise), will further highlight the importance of developing these structures and relationships. Similarly, board dynamics are complex and ever-changing. Board changes can affect relationships; therefore the need for succession planning remains strong. Maintaining the appropriate balance of formal processes It is important that the board implements a combination of both formal and informal processes, which are reflective of the maturity and culture of the organisation. Examples of key formal processes include setting a board agenda that does not focus purely upon short-term objectives. The agenda should be set by the chair and should also be informed by input from non-executive director(s) where required. Risk and opportunity management (ROM) should be embedded within the board agenda to promote engagement and discussion on scenarios that impact upon organisational strategy and objectives. Attention should be paid to the conduct of board meetings to ensure that meetings are adequately chaired, engaging and ultimately adding value to the organisation. It is hugely counterproductive if meetings evolve into ‘talking shops’ without effective decision-making processes. The distribution of the agenda should also allow adequate time for board members to consider the agenda and review the supporting board pack. Doing so will maximise the effectiveness of the meetings. High-quality and up-to-date management information, which helps the board understand and analyse key performance data and indicators, should be used. The development of board-level management information should be agreed with the CEO and/or senior management so that there is a clear understanding of board needs and what existing information and data can actually be provided. This is an important area that is often overlooked and can cause significant tension between the board and management. Such tension may arise from a perceived view of the board of not receiving the full picture. A clear understanding and focus upon performance data can also underpin the board’s role in setting and monitoring CEO and executive-level performance objectives and the approach to remuneration. The importance of informal processes Many boards often overlook what may be considered ‘informal processes’ when seeking to improve board effectiveness. It should be remembered that board conduct, decision-making and effectiveness are dependent on a combination of factors including relationships, teamwork and communication. In this context, any investment of time and commitment in building strong relationships among board members will normally lead to improved outputs and performance. Examples may include structured away days, planned visits by non-executive board members to different parts of the business, or making use of time away from the formality of board meetings to get to know each other. Private sector governance codes The UK Corporate Governance Code is primarily aimed at listed companies rather than SME or larger unlisted companies. While it is recognised as the leading corporate governance framework, it may not always be suited to organisations that require different considerations to function cohesively. The NSAI Swift 3000 code provides an alternative governance framework and involves rigorous assessment of the board in areas including appointment, composition, competence, independence, remuneration, information, reporting, accountability and audit. In making use of any governance code to facilitate benchmarking or the review of governance processes, the board must avoid a ‘tick-the-box’ approach and should carefully consider what may be described as the softer elements, as outlined above. Conclusion As companies begin to challenge their existing governance processes and systems, the benefits should become evident. If implemented correctly, improved board effectiveness and outcomes will have positive impacts on the long-term sustainability and growth of the company. Justin Moran is Director, Governance, Risk & Internal Controls Division, Mazars.

Sep 13, 2019
Ethics

Penelope Kenny outlines the ethics and governance issues that will likely be under the spotlight in 2017. As the new year takes off, social media is overflowing with reflections on the past year and learnings for 2017. Thoughts on governance and ethics take the long view and it is so delightfully tempting to make predictions. I propose to look at trends for 2017 based on recent developments, with consideration on where the trends may lead our thinking in 2017. This article addresses corporate governance and the ethics agenda. It attempts to identify trends and issues which professionals are likely to see unfold in 2017. Observations from the business of corporate governance Intense activity from legislators and enforcers continues apace. There have been recent updates to legislation; publications on corporate culture, corporate governance and stewardship; and Government requests for corporate governance reform. Of high impact and concern for individual directors and boards are:   The broadening of directors’ responsibilities; The roles and duties of directors being more thoroughly defined; The inclusion of ethics and culture in more corporate governance conversations; and The conversation between corporation and the State. These observations are based on new Irish legislation codifying directors’ responsibilities and recent reports from the Financial Reporting Council (FRC) in the UK. There is also heightened interest in ethics at the core of corporate governance conversations and this is evidenced in the observations contained in the FRC’s 2016 report entitled Corporate Culture and the Role of Boards, which is discussed further below. Directors are now more specifically accountable than before following the codification of directors’ duties and responsibilities in the Companies Act 2014. The new Code of Practice for the Governance of State Bodies, which was published in August 2016, makes directors specifically responsible for all internal controls: financial, operational, compliance and risk management. Previously, directors specifically reported only on the financial controls and the broader responsibilities were implicit. Corporate culture is also being defined as an area of specific responsibility for directors. Last July, the FRC published Corporate Culture and the Role of Boards and this interesting document comments that strong governance underpins a healthy culture. It also states that boards should demonstrate good practice in the boardroom and promote good governance throughout the business. The report examines some thought-provoking questions: How can the board influence and shape culture? How does the board bring corporate values to life? How can the board build trust with stakeholders? How can boards assess, measure and monitor culture? The report suggests that the tone from the top determines organisational culture and furthermore, boards should assess the culture and determine indicators thereof. The board is therefore responsible for the culture, values and ethical standards in their organisations. This gives directors the very broad responsibility of not only setting the culture and values, but also of measuring and assessing organisational culture. The report requests that investors and other stakeholders engage constructively to build respect and trust, and work with companies to achieve long-term value. Investors therefore need to consider carefully how their behaviour can affect the behaviour of the company and understand how their motivations drive company incentives. As board members, a brighter light is being shone on our broad responsibilities to the organisation and its stakeholders. We are also charged with the ongoing quest for effective measures of corporate culture and the implementation of corporate values throughout the organisation. Corporate and individual ethics In practice, the role of the board in “bringing values to life” is problematic. 61.5% of boards do not regularly make ethics and culture a full board agenda item according to the FRC’s report. Corporate values and ethics have been keywords in lamenting the recent large corporate scandals, which continue unabated at home and abroad. Media reporting focuses not only on corporate governance and the board, but on the ethical standards of the board and the individual directors. In an article published by Reuters last September entitled “Wells Fargo scandal reignites the debate about big bank culture”, it was reported that two former Wells Fargo employees filed a class action in California seeking $2.6 billion or more for workers who tried to meet aggressive sales quotas without engaging in fraud and were later demoted, forced to resign or fired. “Wells Fargo knew that their unreasonable quotas were driving these unethical behaviours that were used to fraudulently increase their stock price and benefit the CEO at the expense of the low level employees,” the lawsuit said. All this was reported in The Guardian in September 2016. Closer to home, Fintan O’Toole expressed his outrage in the Irish Times on 2 January 2017: “The appalling scandal in which the banks deceived at least 15,000 of their customers into moving from tracker mortgages to considerably higher interest rates, often at dreadful personal as well as financial cost. It is clear that this defrauding of customers was systematic and deliberate. It operated in 15 banks – essentially the entire Irish system – and so far as we know there is not one case of a “mistake” favouring the customer. It raises in the starkest way exactly what [Matthew] Elderfield was talking about: individual accountability for misselling and overcharging”. Apart from the human misery which we as a society are accepting, what this means for Ireland is that – despite our high levels of compliance and regulation – we have not created corporate and individual accountability nor a culture of ethical behaviour in our institutions. There is much to be done to align corporate culture and individual ethical standards. In Leading with Integrity: A Practical Guide to Business Ethics, Ros O’Shea firmly positions corporate ethics as the responsibility of the individual directors on the board. She links individual leadership values to the values which filter down through the organisation. This conversation is likely to gain momentum in 2017 with ongoing lawsuits and as we continue to further review, question and discuss our ethical guidelines and our own professional ethics. Corporate governance reform We can expect further corporate governance reform from the UK. Prime Minister Theresa May states that: “for people to retain faith in capitalism and free markets, big business must earn and keep the trust and confidence of their customers, employees and the wider public”. This quote is part of her introduction to Corporate Governance Reform: Green Paper 2016, which sets out a new approach to strengthen big business through better corporate governance. In the foreword, the UK Secretary of State, Greg Clark, summarises that “the green paper seeks views on three areas where we want to consider options for updating our corporate governance framework: first, on shareholder influence on executive pay, which has grown much faster over the last two decades than pay generally and than typical corporate performance; second, on whether there are measures that could increase the connection between boards of directors and other groups with an interest in corporate performance such as employees and small suppliers; and third, whether some of the features of corporate governance that have served us well in our listed companies should be extended to the largest privately-held companies at a time in which different types of ownership are more common”. Certainly the thinking in the UK, surmised from this report, indicates that Adam Smith’s Wealth of Nations is left far behind, and society and democracy are not separate from, but are an integral part of, the values and actions of corporations. The wider societal responsibilities of companies and boards are under scrutiny. There is a recognition, certainly in the UK, of companies’ responsibilities to employees, customers, suppliers and wider society. Diversity Diversity on boards remains an area of huge interest for researchers and policy-makers. We are starting to accept the causal link between board diversity and better profitability. The green paper referred to above suggests that board composition should better reflect the demographics of employees and customers. Implicit in that statement is a board more representative of the community it serves. According to a McKinsey report published in September 2016, workplace diversity would improve gross domestic product (GDP) in the UK: “Bridging the UK gender gap in work has the potential to create an extra £150 billion on top of business-as-usual GDP forecasts in 2025, and could translate into 840,000 additional female employees. In this scenario, every one of the United Kingdom’s 12 regions has the potential to gain 5-8% incremental GDP”. Robert Swannell, Chairman of Marks & Spencer, is quoted in the Hampton-Alexander Review of FTSE Women Leaders as saying: “I certainly believe having more diverse boards and senior teams is right and brings better perspectives, challenge and outcomes. It is right for business to reflect the world in which we operate and so we should just get on and do it”. Adam Smith’s support for maximising profits by harnessing employee expertise is replaced by boards, executives and management addressing and including the concerns of all stakeholders in the corporate world. Stakeholder engagement Considering the FRC statement below, directors are being charged with aligning the interests of business and society as part of their corporate governance responsibility: “We share the objective of wider stakeholder engagement by companies and are considering how corporate governance principles can best meet the demands of all stakeholders or be amended to do so. We look forward to responding to the Government’s consultation later this year and will propose measures to realign the interests of business and society… the FRC supports the need for change in the relationship between business and society. As the guardian of the UK Corporate Governance and Stewardship Codes, the FRC is keen to explore how it can ensure governance and investment are more closely aligned with the broad public interest”. This statement goes way beyond the corporate social responsibility (CSR) programmes which corporations heretofore were content with. Corporations are now charged with holding obligations to all stakeholders and being accountable to society as a whole. Similarly, directors are therefore held to account in relation to their obligations to all stakeholders. The UK Stewardship Code, while not updated since 2012, is under continuous review for its impact and implementation. Directors: some key concerns The broadening and better definition of the role and responsibility of directors is a likely interest area for the future as directors are increasingly responsible for a much wider range of legislation and compliance. Recent surveys show that role clarity, complexity, sustainability, changing business models, corporate culture and business reputation in the community are key concerns. Recent research undertaken by Chartered Accountants Ireland, published in the October 2016 edition of Accountancy Ireland and written by Mary Halton, suggests that role clarity in the boardroom is a driving factor in board effectiveness. It states: “In theory, this should be a relatively straightforward issue, particularly in light of the significant legal, regulatory and good practice guidance available. In practice, however, boards and their members face a number of challenges in delineating roles and ensuring that these are consistently understood by all”. Increasing complexity and the time commitment involved in non-executive directors’ roles is the key finding from a survey by the Institute of Directors in Ireland of 385 of its members in 2016. The Institute of Directors surveyed non-executive directors from private state and public boards. The Australian Institute of Company Directors, meanwhile, surveyed its members in December 2016 on the issues most likely to keep them “awake at night”. The results were identified as follows in order of importance:   Sustainability and long-term growth prospects; Structural change or changing business models; Corporate culture; Business reputation in the community; and Legal and regulatory compliance. Directors are not only showing interest in the business environment which delivers profits, but also showing an increased self-consciousness about themselves as directors and their roles and responsibilities. Formalising this trend, the board self-assessment questionnaires mandated by the Code of Practice for State Bodies 2016 requires boards and the audit and risk committees of state boards to self-assess for effectiveness. Corporation and the state In 2016, we saw the rise of a populist, anti-establishment voter. In Ireland, the water charges were an example. The tussle between states and corporations was exposed with the Apple Inc’s taxes and Deutsche Bank’s fines, both of which resulted in a dialogue between European and American legislative and tax authorities. As our corporations change their goals and purpose and our governments struggle with the corporate environment, this tectonic abrasion between corporations and governments looks set to continue. Conclusion Corporate governance reform is under way in the UK, and indeed in Ireland, against a background of government-led reforms. There is a corporate interest in being more responsible and more state-like. This suggests that the lines between corporation and state may be blurring. Boards are under pressure to represent a more diverse opinion and to mirror the communities which they serve. Meanwhile, these communities are becoming more vocal. Peter Cosgrove of CPL showed the recent Chartered Accountants Tech Forum how employees at Mozilla effectively fired their CEO, Brendan Eich, through social media pressure, which looks remarkably similar to a form of popular voting. (Eich maintained a public stance against gay marriage in 2014, and employees disagreed). Similarly, the US elections were beleaguered with accusations of corporations wielding influence on the outcome via large funding for the candidates. Certainly the future lies in greater regulation of corporations and greater expectations of corporate governance standards. This is occurring at a time when corporations are gathering more power, money and influence than sovereign states and at a time when the workplace is becoming more transparent and more democratised. Chartered Accountants are charged as professionals and often as board members to navigate in this increasingly political space – not just to direct and govern, but also to influence, guide and comment on compliance and regulation. The duties and responsibilities of board directors require more professionalism and more knowledge. We know our responsibilities do not increase or decrease with the size of the organisations we direct and govern, nor with remuneration for these roles, yet those responsibilities are expanding. The boundaries of the study and discipline of corporate governance itself are widening and shifting. We have seen from the UK Prime Minister’s comments on the reform of corporate governance that better corporate governance is seen as a driver for such issues as corporate responsibility, improved profits and more stakeholder engagement to name but a few. Interesting opportunities abound. Penelope Kenny FCA is author of ‘Corporate Governance for the Irish Arts Sector’, published by Chartered Accountants Ireland. 

Sep 13, 2019
Spotlight

While diversity is the buzzword of today, it will soon be replaced by inclusion. Dawn Leane explains how both diversity and inclusion can be integrated in organisations of all sizes. It is virtually impossible to write an article on workplace diversity without referencing equality and inclusion. If diversity is the current hot topic in the workplace, then equality was its predecessor and inclusion will be its successor.   In a workplace context, equality is often associated with compliance. It suggests that as a society, we must legislate for our differences and sanction transgressions. The term “equality” is synonymous with the nine grounds on which discrimination is outlawed.   Diversity is a different concept. It is about valuing our differences, and it has a broader frame of reference than equality, including matters such as personality, cognitive style, education and socio-economic status.   Inclusion, while closely related, is still a different concept. The Society for Human Resources Management defines inclusion as “the achievement of a work environment in which all individuals are treated fairly and respectfully, have equal access to opportunities and resources, and can contribute fully to the organisation’s success”. It is the deliberate act of welcoming diversity and creating an environment where all different kinds of people can thrive and succeed.   But diversity is the buzzword of the moment. Employers have progressed from complying with equality legislation to recognising that a diverse workforce brings many benefits: innovation; balanced decision-making; reduced group-think; retention of key staff; and improved risk management among others.   Perhaps unsurprisingly, the technology sector is leading the way in creating workplaces that are genuinely diverse. While Apple contends that “the most innovative company must also be the most diverse”, Intel declares that “innovation begins with inclusion”. It’s easy to see how the technology sector readily benefits from diversity but other areas, including the professions, are also embracing the fact that diversity is good for business.   Nonetheless success rates for diversity initiatives are still low. A report published in January by the ESRI highlights the fact that the unemployment rate for the Travelling community is 82%. None of the community is employed in a profession and just 3% are employed in managerial or technical roles compared to 28% of the general population.   In March, the Central Bank of Ireland published a report which analysed the gender breakdown of applications for pre-approval as part of the fitness and probity regime. Of the pre-approval applications received by the Central Bank since 2012, over 80% have been from male applicants.   Why is it that so many diversity initiatives fail to deliver the desired outcomes? One reason is that many organisations take a ‘top down’ approach to diversity initiatives. While tone at the top is crucial to ensuring success, the top down approach can often manifest as policies and procedures that attempt to redress balance rather than encouraging a change in attitude.   A recent Harvard Business Review article outlined the negative impact of such policies, claiming that they are often counter-productive. The article suggests that the reason most diversity programs aren’t increasing diversity is because organisations are still utilising the same approaches that they have always used and relying on diversity training, hiring tests, performance ratings and grievance systems to support the diversity agenda.   Creating a diverse and inclusive workplace can mean changing the culture of an organisation. The best results are achieved when the focus is less on control and more on challenging existing attitudes, providing supports and encouraging accountability to ensure that good practice becomes embedded in the organisation. The following outlines specific initiatives that are delivering results. Accountability This is the most fundamental change an organisation can make. Without it, the other initiatives can fail to have any impact. It’s the old maxim – what gets measured gets done. For many organisations, publicly committing to diversity and publishing results – whether positive or negative – is driving change. Apple is among a number of organisations that publishes its hiring trends, highlighting areas such as representation among ethnicities and pay equity. While Intel also publishes its hiring rates, exit rates, promotion rates and pay equity, it goes a step further and ties a portion of its executives’ pay to achieving the organisation’s diversity goals. Education versus diversity training Organisations continue to provide diversity training, although it has been proved that such training doesn’t make people discard their biases – at best, it ensures that they are compliant. No-one is immune to unconscious bias; it is a manifestation of our life experiences. However, it often leads the best and brightest to feel unwelcome and not part of the success of the organisation. Rather than diversity training, progressive organisations such as Adobe are delivering enhanced awareness programmes to help eliminate hidden biases. These programmes cover topics such as how to identify bias, strategies and tactics for better decision-making, and how to speak up. Individualised development Most women say a clear path to career progression is important at work and, in response, organisations are now developing personalised, modular development plans to foster future leaders and improve gender diversity in leadership roles. Sponsorships Organisations are evolving beyond mentoring programmes towards sponsorship as a means to help level the playing field for under-represented groups. Sponsors serve a different purpose to mentors or coaching – they advocate for the advancement of people in the workplace, championing their work and potential with other senior leaders, helping them to secure optimal work allocation and opportunities to be more visible. Sponsorship is of particular help to women in the workplace and many relationships focus on women helping other women to gain profile at work. Returnships Returnships are a relatively recent development. Essentially, it is a professional internship designed specifically for people, most often women, returning after an extended career break. The position is relatively short-term, usually six months or so, and it allows the returner to refresh their existing skills and experience while deciding whether they want to return permanently to such a role. Returnships provide the returner with an opportunity to build their confidence and gain recent experience for their CV, while employers benefit from gaining access to the skills of experienced professionals. Inter-generational networks While many organisations were fearful of the impact millennials would have in the workplace, the more forward-thinking embraced the change and developed programmes to integrate existing and new generations. Such programmes include reciprocal mentoring, where younger people partner with longer serving ones to achieve specific business objectives. Generally, the younger person teaches the older person about the power of technology to drive business results while the longer serving person shares their experience and organisational capital. Over time, millennials will become a demographic bridge between Generation X and subsequent, more diverse generations at work. The ability of millennials to advocate and become accepted will be key to the successful transition from diversity to inclusiveness. Accessibility Trinity College Dublin established the first third-level programme for people with an intellectual disability in Ireland. The Trinity Centre for People with Intellectual Disabilities provides access to education and ultimately to the workplace to people who previously would have been excluded from both. Employers such as Bank of Ireland have recognised the contribution that can be made by those from such marginalised groups. Promoting family-friendly policies Most fathers in the workplace belong to a generation of men who place more value on work-life balance and taking time off with their children. Yet most family-friendly policies tend to be aimed at women and it is usually women who end up leaving the workforce to care for children or ageing parents. President and CEO of New America, Anne-Marie Slaughter, and Facebook COO, Sheryl Sandberg, agree that, in order to support women’s progression in the workplace, men must be allowed to take more responsibility at home. Organisations are beginning to encourage male employees to avail of family-friendly practices by “normalising” such practice. In the US, Facebook offers four months of paid leave to both male and female employees. Its CEO, Mark Zuckerberg, made a very public statement by taking two months’ paternity leave when his daughter was born. Conclusion The key to creating a diverse workplace is really quite simple. The starting point is to look beyond compliance and do what is right, rather than what is required. The role of senior management is to set the tone, to educate people and empower them to act; to make them accountable and trust them to do the right thing. Then, pay real attention to the results.   Intel’s Chief Diversity Officer, Danielle Brown, suggests that, “For diversity and inclusion work to really be successful and really break through, it absolutely can’t be an initiative that is buried in HR. Diversity and inclusion absolutely has to be an integral part of culture and part of everything that we do.”   With the implementation of such positive initiatives and future generations shifting attitudes and expectations, workplaces are being reshaped to become not just diverse but inclusive, closing the circle so that the term ‘equality’ reclaims its real meaning – the state of being equal, especially in status, rights or opportunities.ty and inclusion can be integrated in organisations of all sizes.  Dawn Leane is Director of People and Resources at Chartered Accountants Ireland.

Sep 12, 2019
Strategy

There has never been a better time to start your own business. Let me explain why… By Michael J. Walls Lately, I have focused on how cloud technology can transform an existing business, but what if you want to start your own business? How can cloud technology help a start-up? The good news is that there has never been a better time to start your own business. As a Chartered Accountant, you only have to take look at various job sites where numerous ‘finance transformation’ roles are listed. This is a clear indication that businesses recognise the need to embrace new technology, including cloud technology and robotic process automation (RPA), if they want to maintain their competitive advantage into the future. For a budding entrepreneur setting up their own business, embracing cloud technology from the outset can give their start-up a competitive advantage over existing businesses yet to embark on a digital transformation project. Technology has tipped the scales The introduction of cloud-based technology has drastically changed the way businesses operate. Starting a new business no longer requires a significant investment in IT infrastructure such as on-site servers and telephony. Nowadays, all that is required is a laptop or mobile device, and a good internet connection. Cloud-based technology enables businesses to access the following benefits, which will give them an edge over existing competitors: Flexible working: employees with a mobile device and an internet connection can work anywhere. This widens the talent pool when recruiting employees or hiring freelancers; Collaborative: cloud-based tools enable teams to work on the same document in real-time from anywhere in the world, negating the need for multiple document versions and making the process more efficient; Business continuity: operating in the cloud means that business data is not stored on-site or on devices. If your premises or laptop are destroyed, all you need to do is pick up another laptop, log on, and continue to operate your business; Scalable: in the past, start-ups would have been at a disadvantage against larger companies with on-site IT capacity. Now, start-ups are on a level playing field without the need to invest heavily in physical IT infrastructure; and Future-proofed: with the growth of emerging technologies (such as the Internet of Things), the amount of data businesses collect and process will increase exponentially. This will require big data analytics to provide vital information on driving business development and growth. Cloud computing will make it easy to deploy the necessary applications to process big data. Cash is king, but data is queen As Chartered Accountants, we are all familiar with the phrase that ‘cash is king’. While I agree with this sentiment, in a digital age, I would add that accurate and timely data is queen when it comes to creating realistic cash flow forecasts for your business and making decisions. Businesses have traditionally used spreadsheets to manage their cash flow forecast, which can take a lot of time and effort to update and maintain, and may not be accurate or realistic. Operating in the cloud enables businesses to utilise open APIs (application programming interface) on cloud-based accounting systems to integrate bank feeds and other third-party applications. Business owners can easily integrate a cloud-based cash flow forecasting solution with their accounting system. This will ensure that the information used to create the cash flow will always be up-to-date and reliable. Some of the solutions I have used also include the following features: Dashboards: at a glance, business owners have the most pertinent information in relation to their cash flow. Data can include current and future available cash balance; upcoming receipts and payments; forecast for the next 12 weeks; or any bank reconciling items; Forecasting: this is made simple as the solution analyses the data in the accounting system to create a forecast, which can be easily adjusted; and Scenarios: various ‘what if’ scenarios can easily be created and layered over the main forecast to help with future planning (for example, an increase or decrease in sales receipts). Investment ready Start-ups that embrace cloud-based technology from the outset are more agile. This, coupled with having up-to-date information on your start-up’s performance, means that when you are ready to seek investment, you will be able to respond to due diligence queries more efficiently. This will give investors more confidence in how your business is operated and will help them make an investment decision much faster. Conclusion If you are setting up your own business, you should adopt a digital-first approach to gain a competitive advantage on existing businesses that have not yet made the move to the cloud. This will also ensure that your start-up is built for scale and future-proofed vis-à-vis emerging technologies.  Start-up tips You’ve got an idea, developed your business plan and are ready to incorporate your company. What advice would I have appreciated when I reached this stage? 1. Choose the name The Companies Registration Office (CRO) is strict about your company’s name. If it is too similar to an existing entity, the CRO may reject your application to incorporate. My advice is to check the CRO register as soon as possible and reserve the company name if it is crucial for your business. 2. Secure the domain Once your business name has been decided, assuming there are no issues with the CRO, you should purchase the domain name. There are various sites, such as godaddy.com or 101domain.com, where you can search for and purchase your company’s domain. You will note that a lot of the dot-com domain names have already been purchased by individuals seeking to make a significant return. Businesses are getting around this by using ‘wearecompany.com’ or ‘thisiscompany.com’. 3. Banking can take time Setting up traditional banking arrangements can take two to three weeks, as there are various anti-money laundering (AML) and know your customer (KYC) procedures to complete. You should have a contingency plan for taking customer payments. 4. Digital banking There are many online banking and payment solutions that are a lot more efficient to set up. For example, I was able to set up Revolut Business Banking for Dappr within 24 hours, which included the AML and KYC checks. 5. Don’t forget tax You will also need to register your company for tax. Form TR2 is relatively straightforward to complete. However, the email address to submit the form was deactivated and I had to post the completed form to Revenue. Michael J. Walls ACA is the Founder and CEO of Dappr.

Aug 01, 2019
Strategy

Blockchain represents both an end and a beginning for the accountancy profession. By Fearghal McHugh and Dr Trevor Clohessy Transparency can be considered the holy grail of governance best practice. The codes, acts and markets demand it as it enhances the view of corporate transactions, which has in turn affected issues such as environmental and sustainability reporting. Transparency is the core of blockchain, which will affect accountancy while satisfying this core principle and driver of good corporate governance. The difference is that it will not take the blockchain elements outlined below as long to become mainstream as it has taken to impact on environment and sustainability concerns. The consensus is that blockchain and its technologies will change the people skills, the processes, the systems and the structure of accounting practice currently applied to any transactions involved in the recording of any information. This has big implications for those in the sector but, significantly, gives a market opportunity to those who are not. Indeed, this opportunity is further enhanced when artificial intelligence integrates with blockchain. Scale of disruption The potential disruption is on the same scale as Amazon, which competes with all retail shops in the country. The first to market with the ‘Accountazon’ brand, named here first, will dent the current position of large or small practices. Accountazon requires accountants, but the ability to scale, integrate and generate output based on fully transparent and rules-based decision-making at the lower level of processing while, at the upper level, having the decision-making and knowledge base of a collective of highly-paid accountants will affect the accounting industry. This can drive the accounting industry to build on specialisation and value proposition offerings at a higher level than those currently generating income. In other words, intelligent computer systems will do what accountants currently do. The impact will force the industry to seek a new place away from rudimentary transaction-type roles of fundamental audit and tax processes. This will require in-depth knowledge (which artificial intelligence can replace) to pure decision-making; in essence, the better the decision-making, the higher one’s revenue and reputation. The purpose and role of accountants will remain, but will be implemented at a higher knowledge application and analysis level and further away from the current operations position and perspective. A personal approach There is no need for panic yet. As with Amazon, retail shops have continued in business but the pricing, delivery, support, convenience and speed we enjoy from the online retailer may also need to be addressed in the accountancy industry; we need to make accountancy accessible, friendly, convenient, productive and transparent. Either the market or the technology will drive the change, or the accountancy industry will embrace it first and deliver value. A Ryanair approach, encouraging a more direct business model using technology, could be applied in the accountancy industry and is more likely now with blockchain and artificial intelligence. The middleman remains the accountant, however, and if it is deemed that a lot of processes don’t add value, the middleman needs to present a value proposition that cannot be offered by the system itself in order to add future value. In the Ryanair model context, so many travel agents adjusted and seem to have found that personal service, customisation and the time taken to provide a tailored travel package for customers is what many consumers want. The drive for digitisation An example of a driver of this type of change arose earlier this year when the then-head of the IMF, Christine Lagarde, urged central banks to launch digital currencies to satisfy public policy, financial inclusion, security, consumer protection and privacy in payments. While blockchain is mostly linked with cryptocurrencies, digitisation policies embraced by companies like Nestlé, Guinness and Glanbia are being encouraged by stakeholders but embraced in a controlled manner. Blockchain technology is part of the cryptocurrency system that actually worked. It is becoming embedded in many industries from manufacturing to web-based services, facilitating faster and more secure transactions on a growing scale. When companies and consumers have a better, easier, faster and more transparent way to do business, they will select it as time is a critical factor in corporate life. The practical elements and approaches to blockchain, as highlighted below, will be seen by clients as having the potential to reduce charges and the time involved in accountant reviews and advice, which Revenue could see as a means of speeding up returns. Public versus private Blockchain is not a mobile application, a company or a cryptocurrency. In its simplest terms, blockchain is a ledger that records transactions digitally and records details about the transaction. These details are recorded in multiple places on the same network. Blockchain comes in two flavours: public and private. A public blockchain allows anybody on the network to input transactions and data onto the blockchain. No single entity controls the network. A public blockchain operates like Wikipedia in that users have a composite view that’s constantly changing. Bitcoin, the tradename used to represent the familiar digital currency along with another called Ethereum are examples of public blockchains. Private blockchains work in a similar fashion to public blockchains, but with access restrictions that control who has access to the network. One or multiple entities control the network. Think of this in terms of a traditional database system that can only be accessed by specific authorised employees. Two features differentiate blockchain digital ledgers from traditional ledgers. First, the assets and transactions recorded in these digital ledgers are secured through cryptography. As an example, in season four of the Netflix drama, Narcos, Guillermo Pallomari’s financial ledgers records are taken as evidence by the Drug Enforcement Authority (DEA). However, due to the complicated coding system deployed by Pallomari within these financial ledgers, the DEA is unable to decipher the transactions and/or assets in order to use them as evidence. Pallomari holds the encryption key, which would enable the DEA to crack the code. In terms of blockchain, this also holds true. Due to sophisticated encryption keys, the transactions and assets are secure, immutable and unforgeable. Second, blockchain encompasses the disintermediation of traditional financial intermediaries (e.g. banks, brokerages, mutual funds). This disintermediation is made possible by smart contracts, which are complex algorithms that execute the terms and conditions of a traditional contract without the need for human intervention. This leads to a superior ability to prove custodianship and ownership of assets, which could potentially improve efficiency and enhance transparency while also reducing costs and income in the accountancy profession. Complexity and novelty Today, a number of multinational technology organisations enable businesses to implement blockchain practically. For instance, Microsoft currently offers a blockchain development solution that combines the advantages of cloud computing (e.g. virtualisation, scalability, pay-as-you-go pricing model) and blockchain. This service is called Blockchain-as-a-Service (BaaS) and comes with a set of development templates (e.g. smart contract development and integration) that users can deploy and configure with minimal blockchain knowledge. However, prior to diving into the blockchain sea, accountancy organisations should adopt a caveat emptor mantra. History suggests that two dimensions impact on how a new technological trend and its business use can evolve. The first is complexity, which is represented by the level of coordination required by the organisation to produce value with the new technology. The second dimension is novelty, which describes the level of effort a user requires to understand the problems that the new technological trend can solve. The more novel a concept is, the greater the learning curve. Accountancy organisations can develop adoption strategies that map possible blockchain implementations against these two dimensions. Complexity and novelty can vary from low to high in terms of the stage of technology development. For instance, accountancy organisations that are new to the blockchain concept may want to introduce a pilot initiative that is low in novelty and low in complexity. One such initiative could encompass the inclusion of cryptocurrency transactions in a firm’s transactions processes. New skills While blockchain is spread across many systems, it is not public. It protects transactions because they are shared and copied on many parts of storage devices, and would require all parts and copies of the transaction to be amended and/or deleted to have an effect. Deleting a transaction in one place is easy, deleting it from several locations and tracking each one – while not impossible – would require some work. This capability could potentially scare some in that transactions cannot suddenly be erased, but it is encouraging for others. Apply this concept first to the level of payments and receipts and build that up to management reporting, budgets and strategic reports to ensure a higher level of accuracy and clarity. This will eventually lead to a sense of integrity, another governance ideal. With reference to speed, this can move business from reliance on past information to live analysis and if it’s faster, it will be cheaper in the long-run to produce. While a positive for business, it will not require the skill of a finance professional but a computing-finance professional. In a 2018 Irish industry report, one of the authors, Trevor Clohessy, identified that IT/education providers must do more to demystify blockchain and expedite the learning process. The report outlined how the core competencies and skills required for blockchain are broader than the core technology and encompassed skill sets, which fall under the following categories: Foundational technology (e.g. cryptography, public key architecture); Distributed ledger technology (e.g. mining, consensus algorithms); Forensics and law enforcement (e.g. money laundering, dark-net); Markets, economics and finance (e.g. business modelling, cryptonomics); Industrial design (e.g. supply chain, Internet of Things); and Regulations and standards (e.g. smart contracts, governance frameworks). From an accountancy perspective, it is envisaged that certain traditional skills relating to accountancy will be eliminated or reduced (such as reconciliations or provenance assurance, for example). Blockchain transactions will enable new value-adding activities but while the range of extant skills required will change, this change need not be Byzantine. It is envisaged that the markets and regulations categories outlined above will be important for bridging the blockchain literacy gap between various business and technology stakeholders. Looking ahead, accountancy practices can examine their business models in order to derive value from blockchain. Janus, the Roman god, contained both beginnings and endings within him. That duality characterises blockchain too. It will put an end to traditional ways of doing things and usher in a new era for business and for the world at large. It will be divisive, pervasive and transformational all at the same time, and will encourage accountancy professionals to look ahead and not base their operations and decision-making on past data. The blockchain future is one with present and predictive transacting data systems with in-built transparency and integrity.   Fearghal McHugh is a lecturer in Chartered Accountants Ireland and GMIT. Dr Trevor Clohessy is a researcher and lecturer in GMIT.

Aug 01, 2019
Personal Impact

In the first of a four-part series, Kate van der Merwe considers the interplay between Finance and sustainability against a backdrop of increasingly extreme weather events. I love the sound of rain and the fresh release as it makes way for breaking sunshine (on those days that it does make way!) So it is hard to imagine the ferocious cruelty people experienced when Cyclone Idai hit Mozambique, Zimbabwe and Malawi in March, killing over 750 people, displacing far more and destroying infrastructure, livelihoods and businesses. Climate change equates to increasing frequency of such extreme weather globally and Ireland is also vulnerable to heavy rainfall frequency and sea level rises (Dublin Bay has risen at twice the global average over the last 20 years). Growing up in South Africa with an environmentally aware scientist as a father, sustainability is a familiar concept to me and one that has been brought into ever sharper focus in recent years. When I moved from Social Science to qualify as a Chartered Accountant in 2009, there seemed to be little awareness of sustainability within finance. I will investigate this intersection between finance and sustainability in a series of articles, while incorporating economic viability and social well-being. Why care? So first, should you care about climate change? As an inhabitant of this planet, whether you appreciate nature (where you holiday, how you exercise, how you unwind), believe in human rights (how climate change will impact society, particularly the young or marginalised), or are merely concerned with your own net worth (how risks, opportunities and frameworks will fundamentally shift in the future), climate change will affect you. Most will have a vague awareness of climate change at this point. It is hard not to notice Greta Thunberg’s FridaysForFuture movement (which saw over 10,000 protesters gather in Dublin on 15 March 2019), the frequent research warnings released or senior leaders speaking up on the topic. But let’s pause to ask what climate change is. Since industrialisation, population, manufacturing and consumption have significantly increased – all of which uses energy and resources, contributing to climate change. This form of growth mentality has excluded circular or design thinking, driving up greenhouse gas emissions (for example, CO2 emissions in 2011 were 150 times higher than in 1850). These greenhouse gases, when present in the upper layers of the earth’s atmosphere, exacerbate a “greenhouse effect”, whereby a barrier is created, trapping heat, causing climate change and resulting in more extreme weather patterns that are increasingly wet or dry, hot or cold. Growing urgency More than 95% of climate scientists agree that climate change is human-induced. While the first voices to warn of climate change back in the 1980s were dismissed as “tree-huggers”, the eccentric is now the denialist. Maybe the enormity of the challenge – its complexity and the global collaborative efforts required – paralysed leaders. Or perhaps the upfront costs of making fundamental systemic changes made career politicians overly cautious. However, if changes are postponed, consequences will continue to escalate with compounded costs and less successful remediation. It is commonly accepted that for businesses to thrive, they must continually innovate for the future and the future is climate change. There is an opportunity cost associated with denial or a failure to act. The UN’s 2018 IPCC report highlights the danger we face in starker terms than ever before. Impacts are stronger and unfurling quicker than previously predicted, bringing our current growth-based consumptive economy into sharp focus. Following the IPCC report, the World Wildlife Fund (WWF) released a report which found that 60% of the planet’s biodiversity has been destroyed since 1970. Considering the impact on the food sector alone, these two key facts need no narrative: The critical loss of pollinators; and More than 70% of the world’s most produced crops are reliant on pollination. This illustrates the significant ripple-effect consequences of climate change. It is not cost-beneficial. There is no opt-out option. Action is urgently needed from every pocket of society, and businesses have significant potential to be positive agents. The growing trend of both awareness and intersection with finance plays out alongside an increasing global sense of urgency. An existential threat Climate change is the single biggest challenge facing humanity. It is an existential threat, but shifting towards more sustainable alternatives will help stem the severity of climate change. Climate change is already on the agenda of major global accountancy bodies and is increasingly referenced by prominent business leaders. In February, the then-Central Bank Governor, Philip Lane, issued a warning on the dangers of delaying climate action, one of which included financial instability. Readers who have been following these developments will have noticed how the intersection between finance and sustainability has been growing rapidly. I firmly believe that this trend will increase to become a critical part of the professional role of Chartered Accountants. If my prediction is wrong, it will be the least of my concerns, as without meaningful engagement from the finance community, the challenges of climate change will not be met. Finance professionals have key roles to play in reporting critical information, directing funds, and making decisions. Over the next three issues of Accountancy Ireland, I will explore the intersection between the finance world and sustainability, beginning with an examination of our retrospective roles of reporting, including familiar areas such as Environmental, Social, and Governance (ESGs) and sustainability reporting. Thereafter I will look at emerging trends that pose a blend of risks and opportunities.   In closing, to quote Charles Tilley, Chair of IFAC Professional Accountants in Business: “‘Business as usual’ is no longer sustainable”. Kate van der Merwe ACA is responsible for Global gFA Reporting Optimisation at Google. You can also listen to Kate on the Accountancy Ireland Podcast, talking about climate change and sustainability.

Aug 01, 2019
Personal Impact

Unconscious bias isn’t going away – and neither is the pressure for diverse and inclusive workplaces, writes Dr Annette Clancy. Companies are under increasing pressure to improve gender equality, level the pay gap and generally change their approach to workplace inclusion. Part of this demand stems from equality legislation, but there is also growing public pressure to act. However, research tells us that we prefer to be in the company of people who are similar to us. We assume that we will have more in common, that we will be understood and liked, and that there will be minimal conflict. Of course, most of these assumptions are in the realm of fantasy – we all know people who are very similar to us but with whom we have fractious relationships. We also assume that the opposite will be true when it comes to people who are dissimilar to us. Consider, for example, the many stories in the US media of white people calling the police to complain about black people going about their business in their neighbourhoods. Head over heels? Freud went one step further and told us that the relationship between leaders and followers was like the act of falling in love or the state of trance between hypnotist and subject. What Freud was getting at was that we are unconsciously predisposed (in our personal and work lives) to choose people with whom we have a strong emotional attachment. At first glance, none of that makes for very good practice when it comes to increasing diversity, improving recruitment practices or searching for a new job. Hiring the most qualified candidate based on their CV and how they interview for a position seems straightforward enough, but it isn’t just what’s written down or their skills that will always convince the panel to appoint a candidate. Biases based on gender, race and other factors can present unconsciously and influence the decision, even when the panel has the best of intentions. Quick judgements Unconscious bias refers to a bias that we are unaware of and is out of our control. Our brain makes quick judgements about people and situations, and our culture, experiences and background influence these judgements. Everyone has unconscious bias and although training can increase awareness, research suggests that it has a limited effect on behaviour. One of the reasons why training is limited in its effectiveness is because the bias is ‘unconscious’. One afternoon’s worth of instruction is not going to eradicate a lifetime and a society-worth of unconscious programming. What has shown some promise is holding managers, teams and companies to account for the decisions they take. Other strategies include regular discussions on bias, making it an ordinary reflection point and not a ‘once-off’ conversation that is forgotten as soon as it happens. A good starting point for discussion is Harvard’s Project Implicit Tests, which will give you immediate feedback on your biases towards a wide range of issues. Mitigating bias Biases can affect your expectations of different groups. In hiring processes, it’s important to ask if you hold male, female or non-binary candidates to different standards. Assessing candidates ‘blind’ by concealing their name, for example, is another way in which organisations can mitigate bias. Likewise, as a jobseeker, do you have biases towards particular companies that are out of your conscious awareness and may be hindering your search? Biases can also affect how you manage your staff and may be a contributory factor as to why you retain or lose staff. Do you, for example, welcome challenges to your management style? Is it possible that you harbour different expectations of male and female staff members? How open are you to questioning your own unconscious bias? Unconscious bias isn’t going away, and neither is the pressure for diverse and inclusive workplaces. Bringing both of these topics right into the mainstream might be the first step towards having the conversation.   Dr Annette Clancy is Assistant Professor at UCD School of Art, History and Cultural Policy. Annette’s research focuses on emotions in organisations.

Aug 01, 2019
Ethics

CEOs aren’t given instruction manuals when it comes to boards. Kieran Moynihan explains how CEOs and executive teams can give respect to the board while also demanding excellence for the shareholders and stakeholders. My board frustrates the hell out of me. We put a huge effort into producing our packs and I seriously question if they read them properly. They second-guess me and my executive team on a continuous basis, haven’t a strategic bone in their bodies and, to be quite honest, other than their watchdog oversight role, I seriously question if they add any value to this company.” These were the opening words from a CEO in a board evaluation I was leading some time back, and they’re nothing new. I have heard them from CEOs across a wide range of sectors, scale of companies and maturity/experience level.  I asked this CEO to place himself in the shoes of one of his non-executive directors (NED) and imagine how open and engaging the CEO and executive team were towards himself and board. What is the level of genuine accountability and performance culture? Is respect being demonstrated in terms of getting a big complex board pack out four or five working days ahead of the board meeting as opposed to 24 hours beforehand? Are you and the other NEDs expected to drop everything to prepare properly? Finally, how much opportunity does the CEO give NEDs to get them involved in the formation of the company's strategy?  The CEO responded very honestly that he had never really thought about the board in this way and that, in the cold light of day, he could see that he had been in a pattern of ‘managing the board’, and after many years, had arrived at a point where he basically had no expectations of them. This is a sad indictment on this board and the real losers here are the shareholders and broader stakeholders.  The reality is that often the shareholders and stakeholders do not even realise what is going on. I believe that the vast majority of CEOs are very conscientious, and understand the value of a high-performing board, but often struggle with genuinely partnering with their board to enable an outstanding combination of executive and non-executive board members so they can deliver outstanding value for their shareholders and stakeholders.  One of the reasons for this is that there is no 'Becoming a brilliant CEO' manual where CEOs can learn best practice for engaging with the board. As a former CEO, I can testify to the fact that in the early stages, I was very cagey with the board. I wanted to concentrate on the good news, demonstrate that I had the strategy all figured out, and so slipped easily into managing the board. This is a natural and understandable starting point for many CEOs. I was blessed to have an outstanding board chair who gave me a dose of salts early on and helped me engage with and leverage the board properly.   Best practice There are a number of key areas that I have found represent best practice for a CEO and executive team in enabling high-performing board teams. Respect for, and accountability to, the board It should go without saying that a CEO should respect the board but in reality, some CEOs are quite disrespectful, both to the board itself and the board members individually and collectively. In many cases, this can be an aggressive, dominant CEO who merely tolerates the board. In other cases, it can be a lot more subtle. Respect for the board is the key foundation for the CEO and executive team to demonstrate the highest levels of accountability (and, by extension, the shareholders). When a CEO and executive team are accountable to the board, they enable the non-executive board members to discharge their oversight responsibilities. When the CEO and executive team’s reporting is accurate, honest and timely in terms of the performance and progress of the organisation, it means the NEDs don’t have to deep dive into the operational and financial minutiae, or have to second guess the CEO. They can, instead, devote a far bigger portion of the board’s time to strategic discussion and, thereby, adding value to the executive team. Performance culture  Every time I see a high-calibre CEO properly engaging with the board, they not only set high expectations for themselves and employees across the organisation, but also set a very high bar for the board members themselves. Working closely with the board chair, a CEO is absolutely entitled to insist that the board works hard, is able to add value to the executive team and the company, has regular evaluations (both internal and external) and is continually looking to add that extra 10% to the board’s performance.  A partnership model between execs and non-execs  At the core of outstanding board teams is a genuine partnership model between the executive and non-executive board members, which balances a strong level of oversight and significant value-add by the board. The best boards simply embrace the highest levels of robust challenge and debate in order to stretch their brain cells and understand complex issues, get to the bottom of performance problems, see around dark corners and, ultimately, make the very best decisions. A progressive CEO will set the tone for this partnership. By working closely with the board chair, the executive team will be able to deliver their part of this partnership model. In return, the CEO and executive team are entitled to expect the NEDs to add strategic value, bring diverse and independent thinking and, ultimately, enhance the thinking and decision-making of the executive team. This partnership model is illustrated in Figure 1. High-quality information model and information flow to the board A progressive CEO understands that the board is highly dependent on the quality and timeliness of the information provided. In board evaluations, I regularly see the common problem of a very dense board pack with reams of complex reports but very little or no quality guidance from the executive team on what’s critical, the areas the NEDs need to focus on, the areas the executive team need help with or the areas of concern for the CEO and executive team. Combine this problem with the bad habit of sending board packs out late and you can understand why NEDs often feel that they have to second guess the CEO and ask detailed questions at the board meeting. Inspire NEDs to bring their independence and A-game If you read any of the memoirs of highly successful CEOs and entrepreneurs, you will often see the following phrase positioned prominently in the early chapters: “I made a very conscious decision to surround myself with people who were a lot smarter than me”. I often come across CEOs who are very sharp but yet quite happy to pack their board with mediocre NEDs who simply do not add any value. While this is clearly a failure of the board chair, the CEO in many companies has a key role in selecting board members.  Progressive CEOs see the critical value of diversity in their NEDs across age, gender, ethnic background, sector and, most importantly, thinking style. When it comes to NEDs, a CEO and executive team who are partnering extremely well with the board are perfectly entitled to expect each NED to bring their A-game consistently, underpinned by a strong work ethic and commitment to the company. Where NEDs are not doing this, a CEO should work with the board chair to replace those NEDs with ones who will perform and deliver serious value – shareholders absolutely deserve nothing less. Partnering with the board on strategy One of the biggest changes in recent years with how CEOs engage with their boards is in the whole area of strategy. High-performing boards have increasingly moved away from the traditional model of the CEO coming into the boardroom with the company strategy 90% cooked, looking for the board to rubber-stamp the document and allow the executive team to get on with it. Apart from the fact that this legacy approach is very disempowering to the NEDs around the table, and can lead to very serious flawed strategies and group-think problems, CEOs are realising that making big strategy calls in today’s marketplace is a lot tougher than five years ago. These days, the CEO and executive team develop a range of strategic options that they bring to the board at an early stage. This enables every single NED to be involved. In addition to encouraging high-quality challenge and debate around the strategic options identified by the CEO and executive team, it helps the NEDs to put other options on the table which the executive team may not have considered and could ultimately result in a stronger strategy being adopted. Crisis management and asking for help Most companies have to deal with a serious crisis (either self-inflicted or outside of their control) at some point. This could be a significant change in the competitive landscape (business model, pricing, innovation), technology disruption, serious quality problems in products/services, poor sales performance, financial problems, a cyber-attack or a business-impacting loss of critical staff in the company. No matter how strong and battle-hardened a CEO and executive team are, it can be very difficult in the eye of a storm to get an objective perspective on not only root causes, but the optimal way for the company to navigate stormy waters.  A high level of good will, respect and trust that the CEO and executive team have built up with the board over the years is critical in crisis situations. This is where a CEO and an outstanding board can turn to their NEDs, who will roll up the sleeves, get stuck in and provide high-quality help to the executive team and, most importantly, provide a cold, independent perspective to help with the tough decisions.  Setting the example in terms of culture, ethics and behaviours We are in a new era where the spotlight on the behaviour, ethics and culture being demonstrated by a company’s CEO has never been greater. The genie is definitely out of the bottle and the days of some CEOs feeling that it is perfectly acceptable to demonstrate disrespectful bullying, aggressive and passive-aggressive behaviours to their board, their employees and shareholders/stakeholders are coming to an end. Any board worth its salt should be setting the highest of standards for the CEO and executive team. Summary The impact of the CEO and executive team’s approach to the board has a fundamental impact on the effectiveness and performance of a board. I am always moved by the powerful impact it has on the board when a CEO and executive team partner with the NEDs in a respectful and accountable way, demonstrate the highest level of behaviours, ethics and integrity, provide high-quality information flow, partner on strategy, inspire NEDs to go the extra mile and integrate with them to excel on behalf of their shareholders, employees and stakeholders.    Kieran Moynihan is the Managing Partner of Board Excellence.

Aug 01, 2019
Regulation

Paula Nyland considers how Chartered Accountants involved in the third sector can improve transparency and prosperity to the benefit of charities and society at large. The third sector on the island of Ireland impacts directly or indirectly on the work of every Chartered Accountant, whether as a director/trustee, audit practitioner, employee or volunteer. In the Republic of Ireland alone, the sector includes 9,500 non-profits that are incorporated as companies, more than 4,000 primary or secondary schools, and 800 friendly societies, co-operatives, trade unions, professional associations, political parties or charter bodies. Another 15,000 or so are unincorporated associations, clubs and societies. Chartered Accountants are critical to supporting and directing this sector, and it’s important that they are aware of some of the impacts of changing regulatory conditions on their practice.  Greater financial transparency and accountability Since 2014, when it was established under the Charities Act, 2009, the Charities Regulator in the Republic of Ireland has been working to bring greater public transparency and regulatory accountability to the work of the charity sector – about one-third of all non-profits. The Regulator now plans to introduce new regulations that will clarify the reporting requirements for charities in the form of an Irish version of Charities SORP. Charities SORP is a module of FRS 102, which provides guidance on financial accounting and reporting for charitable entities. It is currently mandatory for UK charities, but only recommended for charities in Ireland. Based on our analysis of all of the financial statements filed by Irish non-profits since 2015, Benefacts has discovered that just 12% of Ireland’s incorporated charities currently file financial statements using Charities SORP on a voluntary basis. This will change when the forthcoming regulations are introduced. All larger incorporated charities (more than €250,000 in income or expenditure) will be required to meet these higher standards of disclosure, and will no longer be permitted to file abridged accounts. Currently, the level of abridgement in charities’ accounts here is running at 37%, and this is something the Charities Regulator has repeatedly spoken out on – most recently after the launch of Benefacts’ Sector Analysis Report in April 2019. For the audit profession, there is a clear need to become familiar with these reporting standards, because the question is no longer whether Charities SORP will become a requirement for larger charities in the Republic of Ireland, but when. Guidelines on fundraising and internal control Even in advance of the new regulations on financial reporting, the Charities Regulator has been active in setting standards for the charity sector, with guidelines for fundraising from the public issued in November 2017 and a governance code issued at the end of 2018. These measures, coupled with the Internal Financial Controls Guidelines for Charities, have created a strong foundation for control within the regulated charity sector, in particular for the people serving on the boards of charities and non-profits. VAT repayment scheme  Elsewhere in Government, there have been measures to respond to campaigns from within the sector. Following years of lobbying to change the VAT regime for charities, Government introduced a new scheme that has made €5 million available for recovery annually by charities against VAT paid from non-statutory or non-public funds for costs after 1 January 2018. The deadline for 2018 claims was 30 June 2019. DPER Circular 13 of 2014 Without having the full force of regulations, the standards for financial disclosures promulgated by the Department of Public Expenditure and Reform (DPER) nonetheless deserve to be more widely understood by the accountancy profession. Circular 13 of 2014 is the most important statement of the disclosure standards that are expected of all entities receiving State aid, and it is the responsibility of every government funder to ensure that these are being followed. They set out the requirements for reporting every source of government funding, the type of funding provided (loan, current or capital grant, service fee), the purposes of the funding and the year in which funding is being accounted for. Abridged accounts do not meet the standards of DPER 13/2014, nor do accounts prepared using the new standard for micro-enterprises, FRS 105. FRS 105 (micro entities) When the Companies (Accounting) Act 2017 was commenced on 9 June 2017, it introduced the concept of the Micro Companies Regime, which is provided for in Section 280 of the Companies Act 2014. This allows smaller companies (with two of the following conditions: turnover of €700,000 or less, balance sheet total of €350,000 or less, and no more than 10 employees) to prepare financial statements under FRS 105 instead of FRS 102. FRS 105 provides for minimum disclosures: no directors’ report, no requirement to disclose directors’ remuneration, no disclosure of salary costs or employee numbers. In 2017, 5% of non-profit companies reported to the CRO using this standard, including some that receive funding from the public or from the State.  Charities in the UK are not permitted to report using FRS 105, but as yet there is no such regulation in the Republic of Ireland. The burdens of disclosure Many Irish non-profit organisations receive funding from more than one source – some from many sources, as will be clear from even a cursory glance at the listings of well-known names on www.benefacts.ie. As well as multiple funding sources, most major charities are regulated many times over, if you count the oversight responsibilities of the CRO/ODCE, the Charities Regulator, the Housing Regulator, Revenue, HIQA et al. The high administration and compliance burden represents a real cost – including, of course, the cost of audit fees. At a minimum, of course, company directors must confirm that the company can continue as a going concern; Charities SORP requires that trustees disclose their policy for the maintenance of financial reserves and it is expected that these will reflect a prudent approach to maintaining funds to see them through periods of unexpected difficulty. These are sensible, indeed fundamental, principles and the annual financial reporting cycle is intended to give confidence to all stakeholders that the directors/trustees fully understand their responsibilities and are fulfilling the duties of care, diligence and skill enjoined on them. The €20 million or so currently spent by non-profit companies on audit fees (as yet the public has no access to the accounts of unincorporated charities) should be money well spent. The better the quality of the financial statements, the more these can play a role in initiatives being explored by a number of Government agencies to explore cost-saving “tell-us-once” solutions, supported by Benefacts. Who is accountable? Using current data from filings to the CRO and the Charities Regulator, Benefacts reported in Q1 2019 that 81,500 people are currently serving in the governance of Irish non-profit companies and charities. 49,000 of these serve as the directors of 9,500 non-profit companies, and the rest are the trustees of unincorporated charities. All are subject to regulation, and they include many members of Chartered Accountants Ireland.  By any standard, this is a large sector with more than 163,000 employees and an aggregate turnover in 2017 of €12 billion, €5.9 billion of which came from the State (8.4% of all current public expenditure in that year). Most of this funding was concentrated in only 1% of all the bodies in the sector. Voluntary bodies enjoy some of the highest levels of trust in our society, but it has become clearer in recent years that this trust does not spring from an inexhaustible reservoir. It must be continuously invested in and replenished by the work of every non-profit, most especially in the form of ample and transparent public disclosure – about their values, their work, its impacts, and the sources of their funding. Above all, the board carries responsibility for setting a tone of transparency and accountability, and directors/trustees need to be aware of their personal responsibilities in this regard. As professionals, we are often looked to by our friends and family, by our clients, or by our fellow directors/trustees for advice or leadership. We all know that in any kind of business, the consequence of a loss of public confidence can be dire; in non-profits, it can be fatal.   Paula Nyland FCA is Head of Finance & Operations at Benefacts and Co-Chair of the Non-Profit and Charities Members Group at Chartered Accountants Ireland.

Aug 01, 2019

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